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In re Grigsby-Grunow Inc.

December 7, 1935


Appeals from the District Court of the United States for the Northern District of Illinois, Eastern Division; John P. Barnes, Judge.

Author: Evans

Before EVANS and SPARKS, Circuit Judges, and BRIGGLE, District Judge.

EVANS, Circuit Judge.

These appeals were taken from an order entered in the Grigsby-Grunow bankruptcy proceedings which disallowed preference to a claim presented by the trustee of an employees' welfare association, appellant herein. Bankrupt, prior to its adjudication, employed three thousand persons. They all belonged to an association which had for its objective the development of harmonious relations between bankrupt and its employees and the providing of accident and health insurance for the latter. Bankrupt charged each employee a membership fee of one dollar and deducted twenty-five cents each week from the employee's wage. These sums, after certain expense deductions, were turned over to the association to be invested solely in United States Government bonds and to be used for the aforementioned purposes. Bankrupt deducted the twenty-five cents per week from the wages of each of its employees and charged itself with the said amount and at the same time turned the money over to the welfare association. This practice was followed for some time, but, after February 4, 1933, it neglected to pay all of the funds which it deducted from the wages of its employees to the treasury of the welfare association. When the petition in bankruptcy was filed, it held $14,607.51 of such moneys.

The referee to whom the matter was referred made findings upon which he allowed the claim as a preferential lien against the assets of the estate. On review, the District Court reversed this order and appellant's claim was allowed as a general, but not as a preferred claim.

We quote from the findings of the referee, which are not attacked:

"On February 4, 1933 and prior thereto, the bankrupt maintained in connection with its business, an unincorporated organization known as the 'Majestic Employees Welfare Association,' which had been formerly known as the 'Majestic Employees Welfare and Athletic League.' The Association's purpose was to provide life, health and accident insurance for the benefit of the employees of the bankrupt and their dependents. The Association was governed by its own officers and directorate and maintained its own account in the First National Bank of Chicago. The funds of the Association were invested exclusively in obligations of the United States Government and the earnings and increment of these investments were used for the insurance benefits contemplated by the Association's constitution and by-laws.

"The membership of the Association was comprised exclusively of employees who had been employed for thirty days or more and who had paid the initial fee of$1.00 to the treasury of the Association. The initial fee was automatically deducted by the bankrupt from the amount due as salary or wages of each employee, employed for the required period. In addition to the initial fee there were weekly dues of 25› per week, which were likewise automatically deducted by the bankrupt from the amount due each member as salary or wages.

"Prior to February 4, 1933, the bankrupt regularly paid the Association by check which was deposited in its treasury, the accumulations of each payroll deduction, less deductions for expenses of the Association paid by the bankrupt. Commencing with February 4, 1933, however, the bankrupt began to fall in arrears, and from that time until November 24, 1933, when the Receivers in Equity were appointed for the bankrupt, there was always a balance to the credit of the Association, which it had not paid to the Association. On November 24, 1933 said balance was in the sum of $14,607.51. The deductions of 25› per week, including deduction for the initial fee, were made by charging the employee's account on the payroll records of the bankrupt and crediting the aggregate of all such deductions to the account of the Majestic Employees Welfare Association on the books of the bankrupt. No actual money was taken from the pay envelopes of the employees and deposited in any account of the bankrupt, but to the contrary the matter was handled as a mere bookkeeping entry and at no time did the Grigsby-Grunow Company segregate any money due the Majestic Employees Welfare Association or deposit any money in any separate trust account or bank account.

"On or about August 12, 1933, the Majestic Employees Welfare Association was formally dissolved and disbanded.

"After setting up a fund of some $2,750.00 to cover certain contingent obligations of the Association, all the other assets were conveyed, by apt resolution, to the Majestic Works Council. The Works Council, like the Association, was an unincorporated organization in which the bankrupt and its employees had equal representation. All employees of the bankrupt were members of the Works Council. The Works Council had for its objective harmonious relations between the bankrupt and its employees and conferred numerous benefits upon the employees.

"* * * A claim was filed in the equity receivership case by Maurice Paradise, as Trustee, the petitioner herein, for the payment of $14,607.51 to the Works Council. However, the moneys were never paid.

"The practice of the bankrupt was to deposit all of its incoming revenue in its general bank account, from which it would from time to time withdraw moneys and establish various special accounts. The bankrupt was accustomed to withdrw from its general account or special accounts as the convenience of the situation required, and the payroll was drawn from the various accounts, both general and special, indiscriminately."

Whether a constructive trust was created in appellant's favor must be determined by the legal effect of the bankrupt's acts. The following, taken from the ...

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