Full opinion text
WYATT, District Judge. This is a petition by James Talcott, Inc. (Talcott) to review an order, filed March 15, 1966, of Referee in Bankruptcy Ryan. Bankruptcy Act (Act of July 1, 1898, c. 541, 30 Stat. 544, as amended; the “Act”) 39(c); 11 U.S.C. § 67(c). The order of the Referee disápproved the appointment of New York Credit Men’s Adjustment Bureau, Inc. (Bureau) by creditors as trustee in bankruptcy of Eloise Curtis, Inc. (Curtis). The Act provides that a trustee shall be appointed by the creditors at their first meeting (Section 44a, 11 U.S.C. § 72a) but further provides for approval of such appointment by the Referee (Section 2a(17), 11 U.S.C. § lla(17)). The March 15, 1966 order of the Referee also appointed James G. Foley, Esq. (Foley), trustee of Curtis and fixed the amount of his bond. The Act provides in relevant part: “If the creditors do not appoint a trustee or if the trustee so appointed fails to qualify as herein provided, the court [Referee] shall make the appointment” (Section 44a, 11 U.S.C. § 72a; emphasis supplied). Petitioner Talcott is a general non-priority creditor of Curtis for $10,796.21 and is the largest of such creditors. Tal-cott nominated and voted for the Bureau as trustee at the first meeting of creditors. The petitioner contends that the findings and conclusions of the Referee are “clearly erroneous” or “patently erroneous” (Brief, pp. 20, 27, 68) and were not the exercise of a judicial discretion (Brief, p. 80) but the result of “bias” and “prejudice” (Brief, pp. 31, 39, 41, 48, 69). The petitioner further con--tendp that, if the Referee did exercise a discretion which is sustained by this Court, the matter should be remanded to the Referee for appointment of a new trustee by creditors, it being asserted that the Referee has no power to appoint under the circumstances here. The petitioner also contends that the order under review is a nullity because of an alleged violation by the Referee of Rule 21(a) of the Bankruptcy Rules of this Court. Two of these contentions may be dealt with summarily. Rule 21(a), just mentioned, is as follows: “Referees shall make and file decisions within two months after final submission and shall forthwith give notice of such filing to the parties or their attorneys.” It is asserted for Talcott that the Referee did not make his decision within the two month period. Assuming this to be true (and in view of the lengthy record, it is not surprising), certainly the order of the Referee does not thereby become a “nullity” (Brief, p. 90). The Rule does not so provide; it is highly doubtful that this Court would haye authority so to provide. This contention for Talcott is without merit. As for bias and prejudice by Referee Ryan, I conclude after a careful study of the entire record that no bias and prejudice on his part is shown by the record. In disapproving the Bureau, Referee Ryan undoubtedly exercised a discretion as a judicial officer. The issue is not whether this Court would have made the same decision as the Referee made. The issue here is whether the Referee abused the discretion vested in him by Section 2a(17) of the Act (11 U.S.C. § lla(17)). Thus the problems raised by the petition to review are (a) whether the exercise of discretion by the Referee in disapproving the Bureau as trustee was within permissible limits and (b) if so, whether appointment of a new trustee is properly to be made by the Referee or by creditors. The conclusion which I have reached is that the order of the Referee of March 15, 1966 should be in all respects approved and confirmed. The present petition is but the latest move in a long contest which has required substantial attention from counsel, the Referee, this Court and the Court of Appeals. It may be helpful to an understanding of the present problems if the background events are related chronologically. I Eloise Curtis, Inc. and Young Things, Inc. (Young) are two New York corporations. They made dresses in the same premises at 498 Seventh Avenue in New York City. The ownership of the two corporations was the same. Eloise Curtis and her husband, Harry Jaffe, owned all the stock of Curtis and, although the stock of Young was never issued (and the subscription price never paid), apparently it was in their ownership also. Eloise and Harry directed and operated the two enterprises. Eloise designed the dresses, the piece goods were cut on the premises, and the garments were sewn and finished by outside contractors. Curtis made dresses for women; Young made dresses for children. The only reason there were two corporations instead of one was that union labor on clothes for children is cheaper than on clothes for women. The separation was to facilitate this advantage for the children’s clothes. In the early spring of 1963, Curtis and Young were in serious financial difficulties and their owners, Eloise and Harry, consulted Harris Levin, Esq. They had no operating capital, there were lawsuits pending, in one or more of such lawsuits judgments could be entered shortly, there was a dispossess proceeding, the expected volume of sales had not materialized, the inventory was too large, and the gross profit was too small. The good accounts receivable of both companies had been assigned to MGM Factors Corporation (MGM). The three —Levin, Eloise and Harry — concluded that liquidation was inevitable and the only question was whether it should be by way of bankruptcy in the federal court or by way of an assignment for the benefit of creditors in the state court (New York Debtor and Creditor Law §§ 1 and following). Levin advised that the assignment method in the state court be used and at his suggestion (because some of the creditors were members of groups affiliated with the Bureau) assignments to the Bureau for the benefit of creditors were executed by Curtis and by Young. The two assignments were delivered to the Bureau on April 3, 1963 and after being accepted for the Bureau on April 4, 1963 they were then recorded on the morning of the same day in the office of the Clerk of the County of New York (Debtor and Creditor Law § 3). The Bureau called a meeting of creditors of both companies for April 8, 1963 and sent a notice to all such creditors having claims for more than $500. The meeting was held and Joseph S. Herbert, accountant for the assignors, was present to make a report which included, among other things, that in the two campanies designing expenses were so much that the sales were insufficient to enable the business to show a profit. The creditors formed one committee of five members for both companies, the committee being representative of the five largest general creditors. This committee met on the same day and recommended that the Bureau as assignee employ Fred Landau & Co. (Landau) as accountants, and Hahn, Hessen, Margolis & Ryan, Esqs., as attorneys. This was done. The books and records of the two companies were then turned over to Landau and a report from Landau was asked. Neither Curtis nor Young ever filed the “Debtor’s Schedule” (which includes an inventory of all property) required to be filed by them (Debtor and Creditor Law § 4, subd. 1) nor did the Bureau as assignee follow the statutory procedure to compel them to do so (Debtor and Creditor Law § 4, subd. 2). No assignee in New York may deal with the assigned estate in any way until a bond is filed in an amount determined by the judge (Debtor and Creditor Law § 6). On April 15, 1963 the Bureau as as-signee of Curtis petitioned the state court to fix bond in the amount of $13,-000 and to permit a sale of all assets at auction. It was represented that the assets were at 498 Seventh Avenue and consisted of machinery and equipment ($2,000), piece goods and finished garments ($6,000), and equity in accounts receivable ($5,000). An order as prayed for was made by the court at Special Term Part II on April 15, 1963. A file for Curtis was opened at Special Term Part II Assignment Bureau under volume 28, page 29. The Bureau filed on April 22, 1963 a bond as assignee of Curtis. No order was sought fixing bond as assignee of Young and, of course, no file for Young was opened at Special Term Part II. The Bureau, in qualifing as assignee of Curtis but not as assignee of Young, took the arbitrary position that all the property at 498 Seventh Avenue belonged to Curtis and that Young had no assets. This was after an explanation by counsel that it “would appear” that Young “had no assets” (SM 700-01), that Herbert had treated the two companies “as a consolidated matter” (SM 701) and that they “would eventually have to consolidate both Eloise Curtis and Young Things into one” (SM 701). (The stenographic minutes are principally in four volumes, marked I, II, III, and 4; volumes I through III cover the period April 10, 1964 — March 8, 1965 and their pages are numbered consecutively in the upper right corner from 1 through 1509 but pages 1508 and 1509 have been renumbered in the lower right corner 1507-A and 1507-B; volume 4 covers the period September 4, 1963— March 16, 1964 and its pages are numbered in the lower right corner consecutively from 1508 through 1683; SM references are to upper right numbers from 1 through 1507 and to lower right numbers from 1507-A through 1683; SM references to minutes after March 8, 1965 identify the date and page number.) The Bureau, by authority of the state court, sold at auction on April 22, 1963 all the property on the premises of the two companies at 498 Seventh Avenue. Apparently this was on the assumption that everything belonged to Curtis and nothing to Young. The gross amount realized from the sale was $18,606.98, out of which the Bureau paid $2,562.97 to the auctioneer and for expenses. When Landau was ready to submit a réport, the Bureau called a meeting of the committee of creditors. This meeting was held on June 7, 1963. A written report by Landau as of April 4, 1963 was submitted. This gave figures for Curtis and Young separately but treated them in a “combined statement of affairs” (Ex. 6, p. 3). On a combined basis, it was estimated by Landau that $34,526 would be realized from the assets as follows: from trade accounts receivable (over and above debt to MGM), $11,835; from cash surrender value of insurance policies, $2,300; from cash, employee receivables, merchandise inventory on the premises and furniture and fixtures (at amounts actually realized on auction), $20,391. The unsecured claims of creditors were shown at $273,781. Among the amounts owing to creditors were $383 in “wages payable” and $35,461 in “union benefits payable”. This total amount of $35,844 would be preferred in the state court (Debtor and Creditor Law § 22) and, since expenses of administration are paid first out of assets, it was clear on the basis of the Landau report that unsecured creditors would receive nothing on their claims from the assignment proceedings. The Landau report also showed liabilities for federal, state and other taxes amounting to $33,-142. Counsel for the assignee pointed out to the committee of creditors at the June 7, 1963 meeting the preferred status of the “union benefits payable” in the state court assignment proceedings, namely, that these amounts would be paid in priority to general creditors; he also pointed out that there would be no such priority in bankruptcy. It was then agreed by the committee that, to avoid the state court priority to union benefits, an involuntary petition in bankruptcy would be filed, that the three petitioners required would be three of the creditors represented on the committee, that a letter would be sent out by the Bureau to creditors of Curtis (SM 777) advising that the petition in bankruptcy had been filed and soliciting proofs of claim and powers of attorney running to the committee, that these powers would be voted for the election of the Bureau as trustee, and that the committee as then constituted would become the “official committee” (SM 771) of creditors in bankruptcy (11 U.S.C. § 72b). . It is of interest to note that bankruptcy was agreed upon by the committee for Curtis only. Young was to be left in the state court. The two corporations were separate entities and their assets and liabilities were separate. However, either in reliance upon advice of counsel or for some other reason, the committee of creditors and the Bureau arbitrarily treated all assets of the two corporations as belonging to Curtis and ignored the assets and liabilities of Young. This procedure was bound to create serious confusion at the least. It is also of interest to note that the decision in favor of bankruptcy and to eliminate the preferred status of “union benefits payable” was made by general non-priority creditors who had a very remote interest, if any, in the administration of the estate. In bankruptcy, taxes are entitled to priority over general creditors (11 U.S.C. § 104). There were $38,142 in taxes due on a combined basis and on that basis, with expenses of administration being paid first, it was obvious that general creditors would receive nothing in bankruptcy out of an estate estimated to realize $34,526. A member of the committee of creditors stated at the first meeting of creditors that “tax claims will more than eat up whatever is in it. There is nothing here for creditors, even before we sit down * * * there is nothing there, absolutely nothing.” (SM 1514). As was stated by Talcott in a petition verified April 8, 1964: “The priority tax claims will consume all of the sums which will be on hand after the payment of proper administration expenses”. What in fact will happen to the claims of creditors of Young, after treatment of all assets as belonging to Curtis, is an intriguing matter of speculation. In any event, the general non-priority creditors without any real interest in the matter were able to determine that the assets should be distributed in bankruptcy to pay tax claims rather than in assignment proceedings to pay union benefit claims. On June 27, 1963, an involuntary petition in bankruptcy was filed in this Court against Curtis by three creditors (one of them being Talcott) whose representatives were members of the committee of creditors. The act of bankruptcy was alleged to be the assignment for the benefit of creditors (11 U.S.C. § 21a (4)). The attorneys for the petitioning creditors were the same attorneys who had been retained by the Bureau as assignee of Curtis and Young. On the default of Curtis, Judge McMahon made an order on July 17, 1963, adjudging Curtis a bankrupt and referring the matter to Referee Ryan. No petition in bankruptcy has ever been filed against Young. The Bureau is in theory still acting as assignee of Young under state law but has in general proceeded on the mistaken assumption that Young had no assets. The first meeting of creditors of Curtis took place on September 4, 1963. A member of the committee of creditors attended the meeting with powers of attorney from 79 general non-priority creditors who had filed claims aggregating $69,807.17 (Ex. 49), out of $94,198 total owed by Curtis to general creditors (Ex. 6, p. 5) or about 75% in dollar amount of claims of general creditors. Talcott nominated the Bureau as trustee, there were no other nominations, the claim of Talcott was found by the Referee to be “proper for voting purposes” (SM 1510), and such claim was voted for the Bureau as trustee. The other claims were not voted because there was no necessity to do so. The Referee found that the Bureau had been appointed as trustee (SM 1511). The Referee fixed the bond of the trustee at $16,000 but postponed the filing of a bond until after his decision whether to approve. At the first meeting, there was also appointed by the creditors a committee of five, the members being the same as those who had been on the committee in the, state court assignment proceedings. The Referee at the first meeting on September 4, 1963, stated a belief that “the assignee for the benefit of creditors is not qualified to be elected trustee, because he has a definite conflict of interest * * *” (SM 1514). He adjourned the meeting to September 16 to give Talcott an opportunity to put anything on the record to indicate why the Bureau was not disqualified (SM 1510). There was a hearing at the adjourned meeting on September 16 at which Tal-cott presented the testimony of the assistant secretary of the Bureau. By order with opinion filed September 30, 1963, the Referee disapproved the appointment of the Bureau as trustee because it had been assignee and its accounts as éuch were unsettled. The Referee by the same order appointed Foley as trustee and fixed his bond at $16,000. Foley filed the required bond on October 3 (11 U.S.C. § 78b). The Referee approved the retainer by Foley of Melvin Lloyd Robbins, Esq., as his counsel. On October 9, 1963, in the motion part I granted a motion by Talcott to stay Foley from acting as trustee pending decision by the District Court of the petition by Talcott to review the September 30 order of the Referee. On October 10 at the adjourned first meeting a member of the committee of creditors attempted to nominate another trustee, taking the position that upon disapproval by the Referee of a trustee, creditors (and not the Referee) had the right to appoint a new or substitute trustee. The Referee refused to permit the nomination by creditors of another trustee. By order with memorandum filed November 6 Judge Murphy confirmed “on the opinion of Referee Ryan” the order of Referee Ryan of September 30, both as to disapproval of the Bureau as trustee and as to appointment of Foley as trustee. Judge Murphy also vacated my stay of Foley acting as trustee. Talcott then filed notice of appeal to the Court of Appeals from the November 6 order of Judge Murphy. By order filed November 13 Judge Murphy stayed Foley from acting as trustee pending decision on the appeal. The stay was later modified to expire December 2 so as to enable the Court of Appeals to determine whether there should be a stay. By order filed November 21, the Referee ordered the Bureau to account to the bankruptcy court as assignee of Curtis. The Bureau filed such an account on November 29. On December 2, 1963, the Court of Appeals granted a motion by Talcott for a stay of Foley acting as trustee. Argument of the appeal was set in the same order for December 9. On January 23, 1964, the Court of Appeals reversed the order of Judge Murphy (326 F.2d 698; Smith and Hays, C.JJ.; Clark, C.J., had heard oral argument but did not participate in the decision). Judge Hays for the Court stated that the Bureau should not be disapproved as trustee solely for the reason that it had been assignee, but that the Referee “should exercise his discretion in the light of the particular facts before him”, and that in the case at bar there “may be a question as to the Bureau’s eligibility to act as trustee in the light of its conduct as assignee” (326 F.2d at 701). The Court of Appeals did not consider this last question but noted that it would be “relevant to the referee’s deliberations on remand” (326 F.2d at 701). The Court of Appeals remanded the case “with instructions to the referee to determine the issue as an issue of discretion, rather than an issue of law” (326 F.2d at 701). The Court of Appeals declined to pass on the question whether, on disapproval of a trustee, the Referee had the right to appoint a trustee (326 F.2d at 701). At adjourned first meetings on February 13 and 17, 1964, Talcott suggested that the Referee should hold hearings on the qualifications of the Bureau as trustee. The Referee declined and on February 17, 1964, filed a “memorandum on remand”. This explained that the September 30, 1963, order had been made in the exercise of discretion. The Referee continued “to decline to approve the appointment of the Bureau as the trustee” and stated: “James G. Foley shall continue to serve as trustee”. Talcott petitioned for review of the February 17, 1964 order and on April 8, 1964, Judge Palmieri signed ex parte an order staying Foley from acting as trustee until hearing of an order to show cause seeking the same relief.' By order with opinion filed July 29, 1964 Judge Bryan reversed the Referee’s February 17, 1964 order “because under the unusual circumstances which exist here the ends of justice will be better served by giving Talcot an opportunity to present any further proof which may be available on the questions raised and because a full hearing on the subject may cast light on the dark comers which it has been inferred may exist.” Judge Bryan declined to pass on the authority of the Referee to appoint Foley as trustee. Judge Bryan remanded for further hearings. The further hearings directed by Judge Bryan commenced before the Referee on September 30, 1964. Counsel for Foley appeared. Counsel for the Bureau and for Talcott objected to any participation by Foley in the proceedings on the ground that the order appointing Foley had been reversed. The Referee overruled this objection and counsel for Foley did participate in the proceedings. Evidence was presented at hearings on September 30; on November 13 and 19; on December 2 and 11, 1964; and on January 18, 1965. On January 19, 1965, counsel for the Bureau (being the same as counsel for Talcott) presented to the Referee an application for approval of the payment of a bill of the reporter for stenographic minutes of the hearings before the Referee. The payment was to be made out of funds in the hands of the Bureau as assignee of Curtis. The Referee declined to approve the application because it was “very carefully couched in terms that studiously avoid any recognition of the status of Mr. Foley” (SM 1057), whereas the Referee believed Foley to be the lawfully appointed trustee (SM 1057). The hearings thereafter continued for the receipt of evidence on January 19, 20 and 22, 1965, and on March 8, 1965 at which time there was an adjournment to April 12, 1965. Evidently concerned, among other things, over payment of the reporter for the stenographic minutes (a problem left open by his refusal to approve payment by the Bureau as assignee), the Referee on his own initiative made an order on January 21, 1965, directing the Bureau to turn over to Foley, as trustee of Curtis, all property of Curtis in the hands of the Bureau as assignee of Curtis. The Bureau was also ordered “fully to account * * * by filing * * * a detailed supplemental statement, under oath, showing further disposition”. It was recited in the preamble to this order, among other things, that the accounting of the Bureau as assignee, filed November 29, 1963, appeared to be “not complete”. The Bureau applied to the Referee for an extension of time within which to file a petition to review his January 21, 1965 order. By memorandum and order filed January 29, 1965, this application was denied as “without merit”; the. memorandum was critical of the Bureau both as to the Curtis estate and as to its practices generally. On the same day as the last described order of the Referee, either before that order was filed or being unaware of its filing, the Bureau obtained from Judge Metzner an order extending its time to petition for review of the January 21, 1965 order of the Referee and staying compliance with that order pending determination of the petition to review. On February 11, 1965, the Bureau filed its petition to review the January 21, 1965 order. Bankruptcy Rule 21(c) of this Court is as follows: “To enable referees to comply with Section 39a(8) of the Bankruptcy Act, the party who files with the referee a petition to review a referee’s order, shall, within ten days thereafter, or within such further time as the referee may for cause shown allow, furnish the referee with (1) a transcript of the evidence or a summary thereof agreed on by the parties; (2) all exhibits, and (3) the expense, if any, of transporting the same to the clerk.” On February 24, 1965, the Referee, acting under this rule, made the following order: “ORDERED, that the petitioner for review shall, on or before the 8th day of March, 1965, furnish the undersigned with (1) a transcript of the evidence or the summary thereof agreed on by the parties, and (2) all exhibits not heretofore furnished to the Court.”. The Bureau filed a petition to review this February 24, 1965 order. In addition to the two petitions to review, two orders to show cause were obtained. By order signed March 4 and filed March 5, 1965 and on petition of the Bureau, Judge Levet required Referee Ryan to show cause before this Court why his February 24, 1965 order should not be vacated. Pending determination of this application Judge Levet stayed compliance by the Bureau with that order of the Referee. By order signed March 19 and filed March 24, 1965 and on petition of Tal-cott, Judge Cannella required Referee Ryan to show cause before this Court why his January 21, 1965 order should not be vacated. Talcott applied to the Referee for an adjournment of the hearings before him until after determination by this Court of the two petitions to review and the two orders to show cause. This was denied by the Referee on April 6, 1965. The two petitions to review and the two orders to show cause were argued on April 20, 1965 before Judge Cashin. The United States Attorney appeared for Referee Ryan on the orders to show cause and submitted an affidavit in opposition. By order filed April 22, 1965, and on petition of Talcott, Judge Cashin stayed further sessions of the hearings before the Referee until determination of the matters argued before Judge Cashin. The opinion and decision of Judge Cashin was handed down on June 24, 1965 and is reported in 242 F.Supp. 806. Judge Cashin decided that the ap-pointmefit by the Referee of Foley as trustee was void as beyond the Referee’s power because there is nothing in the Act “to imply that the Referee may appoint an interim trustee while disqualification proceedings are pending or that a nominee of the Referee may act as trustee while a disqualification order is awaiting review” (242 F.Supp. at 808). Judge Cashin declined to comment on “the Referee’s power to appoint a new trustee after a proper disqualification” (242 F.Supp. at 808). Having decided that Foley had no standing on January 21,1965, Judge Cashin reversed the turnover order of the Referee of that date. The petition to review the February 24, 1965 order was held to be moot. The orders to show cause were treated as moot and the practice of obtaining such orders was disapproved “when the normal appeal procedure, through petition to review, is available” (242 F.Supp. at 808). The decision of Judge Cashin points to a gap or defect in the present procedure. There was a considerable period of time during which the Referee was conducting hearings to determine whether the trustee chosen by general creditors should be approved or disapproved. Prior to the decision of Judge Cashin, Foley (the trustee theretofore appointed by the Referee) had participated in the hearings. It was counsel to Foley, doing yeoman service, who developed the facts as to the performance by the Bureau as assignee in the state court. Judge Cashin’s decision seems correct but after that decision Foley could not participate in the hearings, the proceedings were no longer adversary, and further development of the facts was not possible. Whether a receiver in bankruptcy, if appointed in such a situation, would be justified in contesting the choice as trustee of the creditors is doubtful but in any event the Referee could not by local rule (Bankruptcy Rule 8) appoint a receiver and neither the Referee nor a judge of this Court could appoint a receiver except “upon the application of parties in interest” (Section 2a(3), 11 U.S.C. § lla(8)). Up to this point, there had been no qualified trustee to administer the estate of Curtis which had been adjudicated a bankrupt almost two years before, on July 17, 1963. The appointment of the Bureau had not been approved by the Referee; the appointment of Foley had been declared void by Judge Cashin. The administration of the estate by Foley had been stayed for most of the time since his appointment by the Referee. In view of the then situation, a receiver was appointed by Chief Judge Sylvester J. Ryan. By order filed July 6, 1965, and on application of Talcott (apparently ex parte), Judge Ryan appointed John Paul Reiner, Esq., receiver to take charge of the property of the bankrupt Curtis. Act § 2a(8), 11 U.S.C. § 11(a) (3). The receiver promptly qualified as such and all property of Curtis held by the Bureau as assignee and by Foley was promptly turned over by them to the receiver. Meanwhile the Bureau came to life as assignee of Young in the state court. The Bureau executed a petition on July 1, 1965 asking that the amount of a bond as assignee of Young be determined. It was represented that $966.46 had been received from various accounts receivable of Young, that there was a receivable from the factor of $2,391.51, and that the Bureau has “no knowledge, information or belief with respect to any other assets”. An order was made on July 2, 1965 fixing $4,000 as the amount of the bond of the Bureau as assignee of Young. A file for Young was opened at Special Term Part II Assignment Bureau under volume 29, page 45. The Bureau filed on July 12, 1965 a bond as assignee of Young. The Court of Appeals (Moore, Smith, and Anderson, C.JJ.) by order, without opinion, filed September 24, 1965, unanimously affirmed the order of Judge Cashin; this decision of the Court of Appeals is not reported. After the decision of Judge Cashin on June 24, 1965, Foley, as already noted, had no standing in the qualification hearings being conducted before the Referee. On October 15, 1965 counsel for Talcott advised the Referee “that Tal-cott was willing to rest on the record as it noyv stands” (SM, October 15, 1965, p. 45-A) and on that date the record shows that the “hearing under Judge Bryan’s order was closed” (SM, October 15, 1965, p. 46-B). According to the March 15, 1966 opinion (“Op.”) of the Referee (Op. 4), the hearing was concluded on November 15, 1965 — evidently the date when the exhibits and other material were submitted by counsel for Talcott to the Referee. Thereafter on March 15, 1966 the Referee filed the order with opinion which is here on review. The Referee again disapproved the Bureau as trustee of Curtis and appointed Foley in its place. In April 1966 the receiver of Curtis turned over to Foley all property of Curtis then in his hands; in the same month the receiver asked the Referee to settle his accounts and while this has not yet been done, apparently the receiver has ceased to act as such. By order filed May 6, 1966, Judge Frankel stayed Foley from administering the estate until determination of this present petition to review. II It is not clear whether the Referee, in exercising the discretion now under review, found the Bureau in general — that is, apart from its activities in this particular insolvency — to be not sufficiently competent and independent to serve as a trustee in bankruptcy. In his conclusions, the Referee stated that the issue involved “the competency of the candidate in general” (Op. 61). In his findings, the following appear to be directed to the Bureau in general and to be intended as criticism: a. The Bureau is a member of a group of affiliated corporations which is complex (Op. 32-37). b. One of the members of the group is Tri-State Service Corporation (Tri-State) which for a profit acts as a warehouseman for the Bureau and performs clerical services for the Bureau. This means that the Bureau as trustee would not be dealing with its warehouseman at arm’s length but would be dealing with an affiliate (Op. 38-40). c. The Bureau usually employs as auctioneer Arthur Albert & Co. which controls the building in which the Bureau has its offices, occupies part of the building and leases to the Bureau or Tri-State (Op. 40-41). d. The auditors employed by the Bureau “qualify their audits and withhold verification or certification of the Bureau’s financial statements” (Op. 41). e. The Bureau is a “pliant and obedient servant” (Op. 47) of the creditor members, especially of any committee of creditors in an insolvency proceeding (Op. 45-48). f. The Bureau as assignee or trustee always retains as its attorneys that law firm recommended by the committee of creditors, meaning the largest creditors (Op. 48, 49). Since the Bureau is “supine”, it is the attorneys who “dominate the administration” (Op. 49). g. The Bureau has retained as its attorneys in most of its important insolvency matters one or the other of four named law firms (Op. 50-54). h. The Bureau turns over to its attorneys the collection of accounts receivable but large law firms cannot handle collections economically; therefore, “the Bureau creates a partial vacuum in collection efforts” (Op. 55). Petitioner Talcott believes (Brief, p. 65) that the Referee, despite the criticisms noted, did not intend to find the Bureau generally disqualified to be a trustee in any bankruptcy but disqualified only in the case before him — the bankruptcy of Curtis. Apparently respondent Foley agrees with this interpretation (Brief, p. 53). Whether this be the correct interpretation or not, it would seem proper to state that it would in my opinion be an abuse of discretion if the Bureau, on the basis of the findings of the Referee set out above, were generally disapproved as a trustee in bankruptcy of any estate. One of the findings above, that relating to control by the auctioneer Albert of the building where the Bureau has offices (c above), is admittedly in error. The explanation of the error is probably that the record itself is confusing on the point and the Referee may have been misled thereby. Feldman, secretary of the Bureau, testified as to storage space rented by Tri-State: “I think they are on a lease or sublease of Harold [Arthur] Albert & Company. The rent is $395 per month at the present time” (SM 1401). Tri-State does sublet space at 71 West 23d Street (in the same building with the Bureau) but not from Albert (Ex. 70, p. 3). It appears that Albert is a firm of licensed auctioneers (New York City Administrative Code, § B 32-138.0 and following (1964)) and that its offices are at 391 Park Avenue South in Manhattan (Exs. 42, 43). It does not appear in the record but I accept the statements in the brief for petitioner (pp. 59-60) as to the ownership of the building at 71 West 23d Street, from which it is evident that Albert has no interest in that building. As to the finding of a “partial vacuum in collection efforts” (h above), there is no evidence in the record to support such a finding as a generality. There is no evidence that the Bureau always turns over to attorneys all collection efforts on accounts receivable; on the contrary, there is evidence that as a general rule the Bureau does itself collect accounts receivable (e.g., SM 830-31). The suggestion of the Referee is that the Bureau has a motive to avoid collecting accounts receivable “in order to protect its tax exempt status” (Op. 55). This suggestion appears to be based on a misapprehension. While the Bureau is not organized for profit and while its certificate of incorporation contains language appropriate for federal tax exemption as a “board of trade” (26 U.S.C. § 501 (c) (6)), the Regulations have for many years provided that such organizations must not “engage in a regular business of a kind ordinarily carried on for profit” (Treas. Reg. § 1.501(c) (6)-l). It has been held that credit activities are “of a kind ordinarily carried on for profit”. Credit Bureau of Greater New York v. C.I.R., 162 F.2d 7 (2d Cir. 1947). The Bureau would not seem, therefore, to have any “tax exempt status” nor does it seem to claim any such status. I do not find anything in the record to support the observation of the Referee in respect of collections that “a major law firm” cannot economically collect accounts receivable (Op. 55). It may well be true but without some evidence that it is true, the observation cannot serve as a basis for general disapproval of the Bureau as a trustee. As to the practice of the Bureau in retaining attorneys (f and g above), I see nothing in this to merit general disapproval. There is express provision in the Act for a committee of creditors (11 U.S.C. § 72). I find nothing to indicate that the various attorneys retained by the Bureau were incompetent, unprofessional, or in any way disqualified. That a relatively small number of law firms have beeen retained by the Bureau would appear to be irrelevant to any issue here (see Op. 52-54). The evidence does not support the finding (e above) made by the Referee —on the basis of a publicity brochure of the Bureau (Ex. C) — that the Bureau is in all cases “a pliant and obedient servant of the creditors who belong to the Bureau as members, particularly those creditors whose representatives constitute the creditors’ committee in the particular insolvency proceeding” (Op. 47). I have studied the brochure and that part of it quoted by the Referee (Op. 46). It seems tolerably clear that this quoted language refers, as Feldman testified (SM 517-20, 583), to out of court insolvencies rather than to assignment or bankruptcy proceedings. That the auditors of the Bureau “qualify their audits” etc. (d above) seems irrelevant to any issue here, as does the fact that no financial statements were presented of affiliated corporations (Op. 42-3). The Referee does not find that the Bureau is financially irresponsible or that its books are kept in an improper manner. The reason why the auditors “qualify” their opinion seems entirely understandable and reasonable. They were not asked to, and did not, audit “the assets and liabilities of estate accounts” (Ex. M; Op. 42), that is, of estates in which the Bureau was acting as assignee, trustee or in some other capacity. To do so would not only be an enormous and expensive task (at April 30, 1964, the total cash on hand of such estates appears to have been $7,800,000, see Ex. M, Op. 42) but would duplicate the work being done in each such estate by the respective accountants engaged for the purpose. It would also appear that the Bureau would be required to account to the state court in assignee proceedings and to the bankruptcy court in bankruptcy proceedings. Moreover, the Bureau has presumably filed a bond in each of the estates, certainly in those in state or federal court, and can be required to file a bond in the case at bar (11 U.S.C. § 78). The Referee correctly finds (Op. 39) that Tri-State supplies a storage, mul-tigraphing, clerical and mailing service to the Bureau and to other affiliated corporations (SM 1400-02). The Referee correctly finds that the Bureau and TriState are affiliated. I find no justification, however, for his statement that Tri-State is “an apparently independent but actually controlled affiliate” (Op. 40). The implication is that there is some masking or concealment involved, whereas from the record as I understand it the affiliation is open and notorious and the two corporations are in the same building at 71 West 23d Street. I see no reason why the Bureau should be disqualified as trustee because an affiliate performs certain services. There might indeed be some advantages from such a practice, since the cost might well be reduced when spread over the operations of all the corporations affiliated with the Bureau, rather than absorbed by the Bureau alone. Whether amounts paid to Tri-State for particular services should be reimbursed to the Bureau as a trustee in bankruptcy is to be determined by the bankruptcy court as in the case of all other disbursements by a trustee, on audit by the Referee of the accounts of such trustee (11 U.S.C. § 75a (13); General Order 17(4)). This seems to have already been recognized as an applicable principle by the Court of Appeals in its opinion on the first appeal in this matter (326 F.2d at 701). The Referee has correctly found the relationships between the several corporations affiliated with the Bureau. New York Credit & Financial Management Association (the New York Association) has been since about 1905 a non-profit membership corporation for cooperative credit and financial discussion and exchange (SM 461). It is affiliated with National Association of Credit Management, a non-profit membership corporation organized in 1896 and made up of credit groups similar to the New York Association and located all over the country (SM 457). The New York Association is the sole voting member and thus the parent of the Bureau, and controls the Bureau (SM 459, 460, 471-2). This setup was devised to avoid the danger to the tax exempt statute of the New York Association itself which, as seen from the explanation already made, would result if it — rather than the Bureau — carried on adjustment, liquidation and collection activities (SM 458). The New York Association owns all the stock of Tri-State, a stock corporation (Ex. 70). The New York Association also owns all the stock of New York Credit Group Service, Inc., a stock corporation which furnishes services to separate industry credit groups, such as supplying a meeting place for exchange of information, furnishing personnel to manage, supplying secretarial assistance, etc. (SM 469-70. It may be that the Referee is correct also in referring to the “complexity of the group” but considering the enormous size and variety of the New York commercial community, this would not be surprising. The directors of the Bureau (Ex. 12) appear to represent reputable and substantial commercial enterprises and so far as appears from the record the New York Association and its affiliates are long established and trustworthy organizations. If it be the conclusion of the Referee that there are “inherent conflicts of interest” (Op. 32) which necessarily disqualify the Bureau in any insolvency, this in my view is erroneous. For the reasons indicated, I would not approve a general disqualification of the Bureau as trustee. As already noted, the Referee may not have intended such a general disqualification. Ill When the focus of attention is shifted to the activity or inactivity of the Bureau as assignee in the state court, the criticisms of the Bureau by the Referee appear to be for the most part clearly justified. A. The Referee was properly critical of the manner in which the Bureau, its counsel and its accountants ignored the separate assets and liabilities of Curtis and of Young (Op. 18-23, 64-5). The general relationship between these two corporations has already been noted. However close that relationship may have been, they had separate assets, separate liabilities and creditors, and separate books of account. They filed separate tax returns (SM 1280). Joseph S. Herbert & Company (Herbert) had been the accountants for Curtis and Young for several years before the assignments on April 3, 1963. The fiscal year for both companies ended on March 31. The direct, separate expenses of each company were regularly entered in its books. There were some overhead expenses paid by one company which were for the benefit of both and these were allocated between them by formula on the basis of sales; such, for example, were rent, telephone, electricity, and some salaries (SM 1148-49). There were also many transactions between the two companies which required adjustment entries on their books to reflect the state of accounts between them, for example, if one company used piece goods owned by the other (SM 1149) or if direct labor paid for by one company was employed by the other (SM 1153); these adjustments were made by Herbert on an actual cost, not a formula, basis (SM 1153). The allocation and the adjustment entries were made by Herbert monthly in their work papers and were reflected in their monthly reports to the two companies (Exs. H, I, J; SM 1235, 1238); only at the end of each fiscal year were the adjustment entries given by Herbert to the bookkeeper of the two companies for entry on the companies’ books (SM 1235). Thus, at any time during the fiscal year the books of the two companies did not accurately reflect the state of affairs between them (SM 1239). Only the Herbert monthly reports and their work papers would show this accurately. Since Herbert made their last report for January 31, 1963 and did not do an audit for the fiscal year ending March 31, 1963, there were no adjusting entries on the books of the two companies for the period after March 31, 1962. As the Referee properly observed, the Herbert work papers “in effect” were “part of the debtors’ books and records” (Op. 20). There are in evidence a number of financial reports prepared by Herbert, the last one being at January 31, 1963 (Ex. H). All but one of these were produced before the Referee by Herbert, along with their work papers, at the instance of counsel to Foley. Only one Herbert report (Ex. P), that at December 31,1962, was delivered by the Bureau to Landau, apparently by happenstance among the books and papers from the Seventh Avenue premises; this must have been shortly after April 4, 1963. No other reports by Herbert were seen by Landau (the Referee must be mistaken in stating (Op. 20) that Landau had the Herbert report dated March 12, 1963). Neither the Bureau, nor its counsel, nor its accountants ever asked Herbert for any of their reports or workpapers (easily obtainable); they never asked Herbert for any information. This seems inexcusable neglect, especially in view of the invaluable knowledge of Her' bert as to the.transactions between the two companies and as to the identification of their separate assets. The last Herbert report showed that at January 31, 1963 Young had inventory of $35,822.46 on a “necessary to break even” basis (Ex. H; SM 1239-41). The Landau report shows that at April 4, 1963 Young had inventory of $34,526 (Ex. 6, p. 4). This inventory consisted of piece goods, trimming and linings and finished garments at 498 Seventh Avenue, and cut piece goods at sewing contractors (SM 1241, 1247-48). All of this inventory at 498 Seventh Avenue could have been identified from the piece goods book, cutting tickets, records of purchases of trimming and linings, style numbers and tags on finished garments (SM 1241-49). The Bureau made no attempt to identify the inventory but sold it all as belonging to Curtis and took in the proceeds as assignee of Curtis. The goods at sewing contractors were likewise identifiable because Curtis and Young naturally dealt with different contractors (SM 1184); as already explained, Young was separately organized for this very purpose. As later shown, Landau was able to identify the contractors of Curtis and those of Young but in any event the Bureau did nothing about it. Instead of seeking information from Herbert, or Harry, or the bookkeeper (Miss Bernstein) of the two companies so as to enable all the separate assets to be identified, they were simply treated as all belonging to Curtis. According to the Bureau accountants, this was because when they looked “at the books and records”, they felt that they “couldn’t separate the two” (SM 1217). Apparently the effect on creditors of the two companies was ignored, this on the assumption that “most” of the creditors were “on both sets of books” (SM 1218-19). According to counsel for Talcott “these corporations were simply one and so treated for all purposes” (SM 1106). Having arbitrarily assumed that all assets belonged to Curtis and that Young had no assets, naturally the Bureau made no attempt to identify any assets separately as those of Curtis or Young. Disregard by the Bureau of the separate character of the two corporations had further consequences. The Landau report (Ex. 6) showed that at April 4, 1963 officers owed to Curtis $2,618 and to Young $23,934 (which last included subscription to stock of $1,000). This was due from Harry Jaffe, perhaps as to a relatively small amount from Eloise (SM 1116,' 1220-24, 1227, 1273, 1275). There was a loan payable by Curtis to officers of $133,868 but this was subordinated (Ex. K; SM 1117, 134-35). The accountants of the Bureau set off the receivable to Young of $23,934 against the payable by Curtis of $133,868 (Ex. 6, p. 8). This was on the theory that they were “simply one” and despite the fact that the payable was subordinated to other creditors. The Bureau knew from the Landau report (Ex. 6, p. 8) if not earlier that there was subordination but made no inquiry about it and never examined the subordination agreements (SM 900). Herbert had felt that the withdrawals by Harry from Young while there were subordination agreements with Curtis were “unusual”; these withdrawals had made Herbert as accountants “extremely unhappy” (SM 1287). Indeed most of the withdrawals from Young were made by Harry after April 1962 and at a time when Young was insolvent (SM 1300). The Bureau made no effort to collect the receivables due from officers to Curtis or to Young (SM 897). This was on the theory that it was not “an asset of the estate” of Curtis because of the set-off (SM 898), and the setoff was attempted to be justified by the Bureau because “in the normal course of this estate * * * both matters would have been consolidated” (SM 899). As to the receivable due from officers to Young, there appears to be no possible justification for the setoff since the debt due to officers was due from Curtis, not from Young (see SM 1137-38); the separate and different creditors of Young had an obvious interest in the receivable as an asset of the insolvent estate. And, of course, the two estates were never “consolidated”; indeed, they were so far divorced that one is now in this Court and the other in the state court. The neglect by the Bureau of the receivables from officers is not excused by doubt as to their collectibility. A member of the creditors’ committee testified that Harry “never had a dime” (SM 984) but this was based on rumor and not knowledge. The Bureau made no inquiry as to his financial condition. It may also be noted that even as to Curtis there should have been no question of setoff because the payable was subordinated. Moreover, after having treated the two companies in the state court as “simply one”, there was every reason to have both estates administered in bankruptcy if one was to be so administered. Indeed, at the meeting on June 7, 1963 of the committee of creditors when bankruptcy was agreed for Curtis, it was said of the two companies that “they both belong together” (SM983). Yet no petition was filed against Young. The result is a most awkward situation, which could have easily been avoided had not Young been ignored. The Bureau could not itself have petitioned Young into bankruptcy, but it could have advised the step and could have refused to act as assignee or as trustee of Curtis unless it was done. Instead the Bureau ignored the problem and thereby increased the confusion already existing. Responsibility cannot be shifted from the Bureau to its lawyers or accountants because the question was one of common sense and business judgment. The confusing, careless and illogical treatment by the Bureau of the separate assets and liabilities of the two companies, and its then acquiescence in the inconsistent divorce of their insolvency administration between the federal and state court, are enough fully to justify the criticisms of the Referee. B. The Referee was properly critical of the neglect by the Bureau of trade accounts receivable of both Curtis and Young (Op. 25-29, 62-63) during the period from April 3, 1963 (when the assignments were executed) to June 27, 1963 (when the petition in bankruptcy was filed). The books showed that at April 4, 1963 Curtis had accounts receivable of $77,-258 less “allowance for sales discounts” of $6,626 and less “allowance for doubtful accounts” of $10,995 (Ex. 6, p. 4). The Landau report showed net accounts receivable of Curtis of $59,637. The books showed that at April 4, 1963 Young had accounts receivable of $25,-554 less “allowance for sales discounts” of $1,811 and less “allowance for doubtful accounts” of $1,100 (Ex. 6, p. 4). The Landau report showed net accounts receivable of Young of $22,643. Both Curtis and Young had assigned all their accounts receivable (except “doubtful”) to MGM to secure loans under a continuing finance agreement (Ex. 68). This agreement provided that Curtis and Young were “privileged” to collect the accounts receivable for MGM and obligated to turn over the collections to MGM (Ex. 68, paras 3 and 5). This privilege was automatically to terminate upon any insolvency prdceedings (Ex. 68, para 3). Consistently with these provisions MGM had not, prior to April 4, 1963, notified the debtors of the assignment (SM 1338). The financing agreement with MGM also provided (Ex. 68, para 16) that, in the event of an assignment for the benefit of creditors, MGM “shall have the right to retain counsel to represent it and protect its rights and interests hereunder and [Curtis, Young] shall and hereby covenants that it will pay to [MGM] the fees of such counsel, the amount of which fees is hereby fixed at a sum which shall be equal to 15% of [MGM’s] cash advances to [Curtis, Young] which may be outstanding at the time of [such assignment for the benefit of creditors]”. The amount owed by Curtis to MGM on April 4, 1963 according to the MGM books was $44,750.85 (Ex. S) against which Curtis had assigned to MGM accounts receivable of $59,637 according to the Landau report (Ex. 6, pp. 4, 7 (note D). The amount owed by Young to MGM on April 4, 1963 according to the MGM books was $14,359.76 (Ex. T) against which Young had assigned to MGM accounts receivable of $22,643 according to the Landau report (Ex. 6, pp. 4, 7 (note 1)). The amounts shown above as owed to MGM by Curtis and Young on April 4, 1963 are not exactly the same as those found by the Referee (Op. 25) but the difference is of no significance and is probably because the Referee calculated from the Landau report alone whereas I have used figures from the MGM books. The accounts receivable classified “doubtful” ($10,995 in the case of Curtis and $1,100 in the case of Young) apparently were not assigned to MGM (Ex. 6, pp. 3, 4). The Bureau seems to have made no effort to determine whether any of these doubtful accounts could be collected; it did nothing as to them. As to the assigned accounts receivable, MGM sent a notice to the debtors of both companies about April 4, 1963 telling the debtors that future payments should be made only to MGM (SM 1338). The Bureau learned on April 3,1963 of the assignment of the accounts receivable to MGM, and that Harry believed there was an equity of $15,000 (Ex. 21; SM 706). As noted above, on April 4, 1963, Curtis owed MGM $44,750.85 and Young owed MGM $14,359.76. On that day, however, MGM made a charge to the accounts of Curtis and Young of 15% of these amounts owed, relying on the “counsel fee” provision quoted above from the financing agreement. It does not appear that MGM had in fact retained counsel or needed any counsel to “protect its rights and interests”; the charges were probably improper. The amount charged to Curtis was $6,712.63 (Ex. S) and to Young $2,153.96 (Ex. T). Neither the Bureau, nor its accountants nor its lawyers, appear to have acted on or after April 4, 1963 to find out from MGM what • the state of accounts was between MGM and Curtis and between MGM and Young. Whether this failure to act was deliberate or was the result of neglect, it seems to have been a serious mistake. After April 4, 1963, both MGM and the Bureau received payments of accounts receivable. Some debtors sent checks to the Bureau, despite the notice from MGM. The Bureau and its lawyers decided that the checks received by it from debtors should be turned over to MGM. The financing agreement required this, so long as there were moneys owing to MGM. But the Bureau did not know how much was due MGM or how much MGM had received from the accounts receivable and in particular did not know of the 15% charges made by MGM on April 4. Nevertheless between April 4 and May 22, 1963 the Bureau through counsel turned over to MGM all payments received by it from debtors of Curtis and Young (the turnovers were made with express reservation of all rights and disclaimer of any waiver). The amount thus turned over by the Bureau to MGM was $42,717. The Bureau appears to have been laboring under the misapprehension, induced by the Herbert oral report on April 8, 1963 (SM 722), that MGM was owed $91,000 whereas the actual amount was $59,110.61 (Exs. S, T). Some time about May 22, 1963, Landau evidently learned that charges in some amounts had been made by MGM to Curtis and Young on April 4, 1963. The lawyers for the Bureau then wrote to MGM asking for the amount and the authority for the charges. The lawyers declared that no further payments of accounts receivable would be turned over to MGM “until this matter is settled” (Ex. 66). On and after May 22, 1963, all payments received by the Bureau from accounts receivable were on advice of counsel retained and kept in a special bank account. All the Bureau knew was that it was advised by counsel that “the factor was making improper charges” (SM 882). MGM was not advised of the debtors who made payments after May 22. The Bureau had been merely receiving payments which were sent in by debtors. It had made no efforts to collect anything; it did nothing to stimulate debtors to pay (SM 834). It never saw the financing agreement with MGM (SM 836), it never saw any statement of account of MGM (SM 832), it did not know what MGM was doing to collect accounts receivable (SM 845, 1033), it mistakenly thought that MGM had not notified the debtors (SM 1031), and it never had anything to do with MGM, by way of inquiry or otherwise (SM 820-21, 830-31, 845). The Bureau did not follow in this instance what was described in testimony as its normal procedure (SM 1030). After MGM notified the debtors to pay only to it, MGM made “a very concentrated effort at collection” of accounts receivable (SM 1340). When the Bureau on May 22, 1963 stopped turning over to MGM the payments received, MGM was told by counsel to the Bureau to stop all efforts to collect (SM 1340, 1341, 1348); accordingly MGM “stopped collecting” (SM 1345). The Bureau disputes a finding in this respect by the Referee (Op. 28), but there being supporting testimony in the record of a representative of MGM, there is no basis for any reversal of the finding. In any event, it was impossible for MGM to make further collection efforts because it did not know what payments were being received by the Bureau after May 22, 1963, and thus could not know what debtors still owed Curtis or Young (SM 1350). After April 4, 1963, no statements of account were asked of MGM and none were prepared by MGM until statements were supplied to Landau of the accounts of Curtis and Young as at June 7, 1963 (Exs. S, T; SM 1342-43). These show that at that date MGM had been paid in full (including the presumably improper charges of $6,712.63 and $2,153.96) and held a credit balance for Curtis of $222.49 and a credit balance for Young of $4,119.39. This last credit balance included a mistaken credit to Young of $4,048.07 but there was a small credit balance in favor of Young nonetheless. Even after knowledge that MGM had been paid in full, the Bureau made no effort to collect accounts receivable. The Referee found (Op. 27) that against assigned accounts receivable of $82,280, there was collected after April 4, 1963 $75,682. This leaves uncollected $6,598 of such accounts plus the $12,095 of “doubtful accounts” (Ex. 6, p. 4). Of the ac