Appeal from the District Court of the United States for the Northern District of Indiana, South Bend Division.
Before ALSCHULER, EVANS, and FITZHENRY, Circuit Judges.
FITZHENRY, Circuit Judge.
The question here involved arise in an ancillary equity receivership case instituted in the Northern District of Indiana. The original equity proceedings were instituted in the United States District Court for the Western District of Pennsylvania, March 1, 1930. The bill was filed in the Northern District of Indiana, March 4, 1930, where the receiver in the primary case in Pennsylvania, M. W. McClane, and St. Joseph Valley Bank of Elkhart, Ind., were appointed ancillary receivers of the Indiana assets of the insolvent corporation, Sidway-Topliff Company, a Pennsylvania corporation. The receivers took possession of all the Indiana assets of the corporation.
Later, September 22, 1931, the insolvent corporation was adjudged a bankrupt in the Pennsylvania court and M. W. McClane was elected trustee in bankruptcy. The primary receiver turned over all of the assets in his hands to the trustee in bankruptcy and the trustee filed a petition in the Indiana case for an order on the ancillary receivers to turn over all the assets in their hands to him, as trustee.
A final report of the ancillary receivers was filed, in which they asked for authorization to surrender all the assets in their hands to the trustee in bankruptcy. Objecting general creditors and the alleged secured creditors petitioned, and the court granted, leave to intervene and to file their petition resisting the prayer of the receivers to surrender the assets in their hands except upon condition that they, the general creditors and alleged secured creditors in Indiana, first be paid in full out of the Indiana assets, by the ancillary receivers. The District Court entered a decree requiring full payment of the Indiana creditors' claims from the Indiana assets, and directed that a surrender thereafter be made of the remaining assets to the trustee in bankruptcy. From that decree this appeal is taken.
The question primarily involved is as to whether Indiana creditors, citizens or residents of Indiana, domestic corporations, or foreign corporations licensed to do business in Indiana, could lawfully be given priority of payment out of the Indiana assets of the insolvent corporation, and over creditors of the same classes who were citizens or residents of other states of the United States.
The Indiana court, in the order of March 14, 1931, limited the time for filing claims with the ancillary receivers to June 14, 1931, permitting claims to be filed only by Indiana creditors, who were defined in the order as, corporations organized and existing under the laws of the state of Indiana, foreign corporations registered to do business in Indiana, and citizens or residents of Indiana.
Appellees are all Indiana creditors within the description of the order. Of the nineteen appellees, four were claiming mechanics' liens, for the determination and foreclosure of which suits were, and are, pending in the state courts, and two were municipal corporations with tax claims. Appellees (general creditors) predicate their claim of right to full payment out of the Indiana assets upon the fact that they furnished goods and credit to the Indiana plant and were therefore entitled to priority of payment out of the Indiana assets and over creditors, domiciled in other states, furnishing goods or credit to the insolvent. The other secured and lien claimants added to the foregoing theory the further basis for right to priority because of unadjudicated mechanics' liens and tax liens in their favor; and both the secured and unsecured creditors advanced the theory that they were entitled to priority in the Indiana assets because one of the ancillary receivers, M. W. McClane, refused to petition the Indiana court to pay the Indiana creditors in full after the other ancillary co-receiver, St. Joseph Valley Bank of Elkhart, had promised such petition would be filed, and such unfulfilled promise caused the creditors to delay filing their petition seeking full payment until after the Sidway-Topliff Company had been adjudicated a bankrupt.
In the course of the administration of the estate in Indiana, the suggestion was made to the St. Joseph Valley Bank that, under the law of Indiana, creditors within the class described and limited by the decree were first entitled to be paid in full out of the assets of the bankrupt corporation in the hands of the ancillary receivers. The matter was submitted to the Indiana attorney for the ancillary receivers, and as a result he advised the District Court he was about to prepare a petition requiring the ancillary receivers to pay all the Indiana creditors in full before turning over any of the assets of the insolvent corporation to the trustee in bankruptcy, and inquired of the court whether in its opinion the Indiana creditors were entitled to be so paid. He was informed by the court that, while the court was not familiar with the law on the subject, it would grant such petition, if filed, and if there was no objection. The assets in the hands of the ancillary receivers were at that time sufficient to pay in full all the claims of the Indiana creditors, and constituted approximately one-half of the total assets of the bankrupt at the time the receivers were appointed.
The funds from which it was proposed to pay the Indiana creditors in full were those arising from the sale of the unmortgaged Indiana assets of the insolvent. The St. Joseph Valley Bank brought to the attention of M. W. McClane, its co-receiver, and later the trustee in bankruptcy, the proposal to pay the Indiana creditors in full, and McClane took the position that, if it were the law, he might join in the petition to the court for authority to make the adjustment. The matter dragged along for a while, when counsel for the Indiana ancillary receivers wrote to McClane asking him to sign the petition and return it. At the time the petition was presented, the Pennsylvania counsel for the primary receiver was away and could not give the matter his immediate attention. McClane wrote to the Indiana counsel that his attorney would answer his letter. Pending the delay caused by the absence of the Pennsylvania counsel, the Indiana creditors intervened. The cause went to a hearing upon the petition, with the result the court found all of the intervening petitioners were entitled to have their claims, aggregating many thousands of dollars, paid in full by the ancillary receivers. It found that the city of Elkhart and the treasurer of Elkhart county had a first lien on all the real and personal property in the hands of the ancillary receivers, the taxes assessed during 1931 becoming by law such a lien on March 1, 1931, and delinquent by reason of nonpayment on the first Monday in May, 1932; that the taxes assessed for the year 1932 became a lien by law on March 1, 1932; that said taxes were then payable and would become delinquent on the first Monday in May, 1933. This finding of the court was filed July 27, 1932.
Among the court's findings were these:
"The court further finds that the failure of the said M. W. McClane, one of the ancillary receivers herein, to sign said petition and carry out said agreement to file in this court, said petition for the payment of the claims of the Indiana creditors, constituted bad faith and fraud, as to the intervening petitioners herein, and said bad faith and fraud on his part, prevented the Indiana creditors, and especially the intervening petitioners herein from obtaining an order from this court for the payment of their claims in full, in this court.
"The court further finds that at the time said petition would have been filed and said order entered, there was sufficient money in the hands of the ancillary receiver, St. Joseph Valley Bank, in the city of Elkhart, Indiana, from the sale of the assets of the Indiana plant, as aforesaid, to have fully paid each and every claim of the intervening petitioners herein, and, but for such bad faith and fraud on the part of the said M. W. McClane, one of the ancillary receivers herein, each of said intervening creditors would have received the payment of his claims in full, in accordance with the petition prepared by one of the ancillary receivers, or the petition of ...