Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division; Charles Edgar Woodward, Judge.
Before EVANS and SPARKS, Circuit Judges, and LINDLEY, District Judge.
This appeal is from an order of the District Court dismissing appellants' petition for the involuntary reorganization of the appellee building corporation under section 77B of the Bankruptcy Act (11 U.S.C.A. § 207). The four appellants were creditors of the corporation having provable claims against it aggregating more than $1,000 in excess of the securities held by them. Each held a $500 bond. Three of the four petitioning creditors were depositors with the committee and had assented to the plan proposed in the state court. The bondholders committee held on deposit more than ninety-one per cent of the mortgage bonds of an issue aggregating $550,000.
The debtor owned and operated a hotel property in Chicago, and its primary obligations consisted of bonds secured by real estate and chattel mortgages. Upon default at the end of 1929, a self-constituted bondholders committee, none of whose members or officers owned any of the debtor's bonds, solicited and procured large deposits. Foreclosure proceedings were instituted in the state court about a year later, and upon a finding that the property mortgaged under the real estate and chattel mortgages was insufficient security for the bond issue, a receiver was appointed for all of the debtor's property, who since that date had conducted the hotel business.
The charter of the debtor was forfeited in a state court action on June 8, 1932, for failure to pay franchise taxes, and on September 26, 1932, the debtor, in furtherance of a proposed plan for reorganization in the state court, conveyed to the nominee of the bondholders committee the fee simple title of the real estate here involved, and title to all the furniture, furnishings and equipment of the hotel.
A foreclosure decree of sale was entered in 1932, and the committee thereupon proposed a reorganization plan, but for reasons hereinafter stated, it was never consummated. The sale under the decree was held on November 16, 1934, and pursuant to the plan of reorganization, the nominee of the bondholders committee purchased the property for $65,000. The principal amount of the unpaid bond issue was $515,000, with interest from March, 1930. The plan of reorganization was presented to the state court for approval in connection with a petition for confirmation of the sale, but the intervention of appellants' first involuntary petition, in April, 1935, for reorganization of the debtor under section 77B, in connection with which further prosecution of the foreclosure proceedings was enjoined, precluded the consummation of the plan. The sale was not confirmed, and the order was vacated.
Appellants' first involuntary petition for reorganization was based upon the jurisdictional fact that all of the debtor's property was then in the hads of an equity receiver, that is to say the receiver appointed in the foreclosure proceedings. Judge Holly, of the District Court, held the petition sufficient. Afterwards Judge Wilkerson, of the District Court, overruled a motion to vacate that ruling, approved the petition, and held that it had been filed in good faith. To this petition the debtor filed its answer denying insolvency, inability to meet its maturing debts, and that the petition had been filed in good faith. Afterwards it filed its amended and supplemental answer withdrawing any charge of collusion and lack of good faith, but repeating its denial of insolvency and inability to meet its maturing debts.
Subsequently, on February 3, 1936, the Supreme Court announced its decision in Duparquet Hout & Moneuse Company v. Evans, 297 U.S. 216, 56 S. Ct. 412, 80 L. Ed. 591, holding that a foreclosure receivership does not constitute an "equity receivership" within the meaning of section 77B. Thereupon, on February 18, 1936, the debtor's board of directors, at appellants' instigation, passed the following resolution:
"Resolved, that the Corporation is unable to pay its debts as they mature, and that it is willing to be adjudged a bankrupt and to be reorganized under Section 77B of the Bankruptcy Act as amended, and submit itself to the jurisdiction of the Federal Court."
Following the ruling in the Duparquet Case, Judge Wilkerson, on March 19, 1936, dismissed the petition on the ground that there was not an equity receivership pending. Thereupon the committee renewed its efforts to complete the state court reorganization and caused the property to be readvertised for sale. On April 11, 1936, four days before its sale, the instant involuntary petition for reorganization under section 77B was filed by appellants. It alleged the pendency of an equity receivership, and also charged the commission by the debtor of the sixth act of bankruptcy, that is to say, that the debtor had admitted in writing that it was then insolvent and unable to meet its maturing debts and willing to be adjudged bankrupt on that ground. On April 14, 1936, the debtor answered the petition, admitting its allegations and joining in its prayer for relief, and tendered therewith its proposed plan of reorganization. On April 20, 1936, the bondholders protective committee, by permission of court, filed its intervening petition controverting appellants' petition. On the same day the court referred the matter to a special master to report his conclusions of law and fact upon (1) whether or not, upon the facts and law applicable thereto, the court had jurisdiction to grant the prayer of appellants' petition; (2) whether or not appellants' petition was filed in good faith.
The master made a finding of facts and concluded (1) that appellants' petition was not filed in good faith, and (2) that the court had no jurisdiction to grant its prayer. The court approved the master's report, findings and conclusions.
In refusing to vacate Judge Holly's order holding the first petition valid and filed in good faith, Judge Wilkerson had held (1) that the petition was filed in good faith, (2) that the fact that the bonds of the petitioning creditors had been deposited with the committee did not disable such bondholders from acting as creditors in filing the petition under section 77B, and (3) that the petitioners were not guilty of bad faith ...