Appeal from the District Court of the United States for the Northern District of Illinois, Eastern Division, Philip L. Sullivan, Judge.
Before SPARKS, MAJOR, and TREANOR, Circuit Judges.
On December 16, 1931, Henry W. Graf filed a petition in bankruptcy against the Sixty-ninth and Crandon Building Corporation. A decree of dissolution had been entered against it in the state court of Illinois, on June 30, 1931. The petitioner alleged that he was a creditor by virtue of the corporation's promissory note, and that there were less than twelve creditors. The corporation answered January 5, 1932, denying the material allegations of the petition, stating that its creditors were more than twelve, and giving a list of them. On January 19, 1932, by leave of court, the Atlas Iron Works Corporation and the Chicago Asbetos Manufacturing Company, named as creditors in the debtors' list, joined as creditors in Graf's petition. The debtor answered the amended petition, denying its insolvency at any time, admitting a debtor relationship to Graf, and denying that relationship to the two intervening petitioners. It admitted or denied other allegations not here material.
The case remained dormant until October 2, 1936, when the debtor withdrew its original answer and filed in the cause its petition for reorganization under section 77B of the Bankruptcy Act, 11 U.S.C.A. § 207. On October 22, 1936, the Oil City Boiler Works, a judgment creditor, by Cochran and George, its attorneys, entered its appearance in the proceeding for reorganization, and filed its answer denying the good faith of the debtor's petition. On October 26, 1936, the petition was referred to a master on the question of good faith. A hearing was had thereon, after which the Oil City Boiler Works filed its amended answer. Further hearings were had by the master at all of which, appellants' present attorney appeared on behalf of Cochran and George, as attorney for the Boiler Works. On March 13, 1937, the master filed his report recommending the approval of the petition, as filed in good faith.
Before the master's report was acted upon by the Court, Joseph J. Bachunas, a stockholder of the debtor corporation, filed his petition by leave of court, and asked that the debtor's petition for reorganization be dismissed. This petition was also referred to a master, who, on June 4, 1937, after extensive hearings, recommended that the debtor be allowed to withdraw its petition for reorganization, and that a creditors' petition therefor be permitted to be filed. The court approved this recommendation, and the creditors' petition of John M. Hoffman, and others, for the debtor's reorganization, was filed, and referred to a master to determine whether it was filed in good faith.
On August 27, 1937, the master's report was filed. He held that a bankruptcy proceeding was pending at the time the petition for reorganization was filed, even though there had been no adjudication, and for that reason an act of bankruptcy was not required to be alleged in the petition for reorganization. He further held that the fact of dissolution of the debtor by a decree of the state court did not deprive the bankruptcy court of jurisdiction, since the Illinois Corporation Act, Ill. Rev. Stat. 1937, c. 32, § 157.94, allowed the corporation to sue or be sued within two years after that date. He recommended the approval of the petition as filed in good faith.
Before the report was passed upon, and without leave of court, appellants filed their answer to the petition for reorganization. The first two appellants were, and are now, represented by the same attorney who represented the Oil City Boiler Works. This answer raised the same objections which had been argued before the master and disposed of in his report. It further alleged that the four creditors filing the petition for reorganization were not creditors for the following reasons:
(1) That John M. Hoffman had filed a claim for a mechanic's lien in the state court in the sum of $26,000, whereas the value of the material furnished by him did not exceed $8,000, and that thereby he forfeited any claim;
(2) That Paul H. Geyser was the assignee of a claim for $195,675, which had previously been assigned as collateral security to Easthom-Melvin Company to secure a note of $15,850;
(3) That the judgment of $35,000 of Rosenthal, Hamill & Wormser rendered by default in 1931 was void because it was for legal services of a value of not more than $2,500, and 1929 three of the five directors of the debtor were employees of that firm;
(4) That Leichenko and Esser had filed a claim in the state court for a mechanic's lien in the sum of $34,827, whereas the value of the services rendered by them did not exceed $15,000, and that thereby they had forfeited any claim.
The court confirmed the master's report on October 26, 1937, and held that the petition was properly filed under section 77B, and in good faith. By the same order the court appointed a temporary trustee, provided for the filing of claims and a date for hearing same before the master. By this order the court referred to the master for hearing the proposed plan of reorganization, and denied appellants' motion for a rule on all parties to reply to their answer, stating that the matters contained in the answer, relative to the validity of claims, should be raised before the master, at the hearing of claims on December 15, 1937. From this order of October 26, 1937, the present appeal is prosecuted.
In substance, appellants contend that the court erred in entering a good faith order before requiring a joinder of issues and a trial upon appellants' answer. This contention is without merit. Subdivisions (a) and (c), clause (1) of section 77B, 11 U.S.C.A. § 207(a), (c)(1), we think, do not contemplate a trial as to the merits before the entry of a good faith order. If such a procedure were allowed, unreasonable delays would necessarily follow, which fact is well illustrated by the attempted procedure in this case. Of course if the claims relied upon are invalid, and are shown on their face to be invalid, they could not be said to have been filed in good faith, and the court, no doubt, would so find. But where, as here, petitioners' claims are apparently valid on their face, and are supported by oaths, and the complaint is otherwise in proper form, we think the statute contemplates that the court shall approve the complaint.Such action, however, would not constitute a final adjudication as to the validity of the claims. They would be required to ...