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In re Prima Co.

August 26, 1938


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

Author: Sparks

Before SPARKS and TREANOR, Circuit Judges, and LINDLEY, District Judge.

SPARKS, Circuit Judge.

These actions arose out of a voluntary reorganization proceeding of the debtor, an Illinois corporation, under sections 77A and 77B of the Bankruptcy Act, 11 U.S.C.A. §§ 206, 207. The debtor's petition was approved as properly filed, and Keig, trustee in bankruptcy, was directed to take possession and control of all the debtor's assets, and to carry on the business under the orders of the court. Subsequently, by leave of court, the trustee filed his petition for certain relief against appellants for losses alleged to have been sustained as a result of appellants' mismanagement of the debtor's business, and for repayment of claims alleged to have been wrongfully and unlawfully paid to them by the debtor. On the same day the debtor filed its petition for permission to join in and adopt the trustee's petition, and to support and assist its prosecution, which was granted.

The trustee's petition set forth the history of the debtor; the transactions incident to the employment of Garnett C. Skinner as general manager of the debtor, through the alleged machination of appellants, and over the objections of the debtor; the charge that Skinner, pursuant to the joint direction and authority of appellants, exclusively controlled and managed the debtor's business and affairs without the direction, guidance or control of its directors and in opposition to its interests, resulting in great losses to the debtor. It further charged that Skinner during his management had wrongfully and injuriously to debtor's interests caused the debtor to issue notes for all of its debts, including $200,000 due to each appellant, and had secured their payment by a trust deed to appellant, the First National Bank; that Skinner had wrongfully caused the debtor to pay to the First National and to Harris the respective sums of $15,700 and $17,625 on July 8, 1936, which hindered, delayed and defrauded other creditors. On these allegations, but more specifically stated, the trustee claimed that the losses suffered during Skinner's management, which began on or about June 25, 1934, and ended August 17, 1936, when the petition for reorganization was filed, were largely due to his mismanagement, and that the banks should answer therefor, and should pay over to the trustee the payments respectively received on July 8, 1936.

Without process the issues were joined by appellants' separate answers which were ordered filed by the court. Both answers denied the charges of the petition. That of the First National Bank began with an express reservation of all benefit of exceptions and objections to the jurisdiction of the District Court over the subject matter of the petition, and concluded with averments that the trustee's petition did not state a cause of action against it, and that the court could not by summary proceedings entertain jurisdiction of the subject matter of that petition.

After extensive hearings, the facts were found specially, conclusions of law were stated, and a decree was rendered adversely to appellants, from which this appeal is prosecuted.

The theories of the trial court, with respect to the losses alleged to have been sustained for which a decree was rendered for $568,895.43, seem to have been:

(1) That Skinner's employment by the debtor was brought about by undue influence of the banks, as a result of which they became trustees de son tort, and as such were required to account for all losses suffered by the debtor during Skinner's employment.

(2) That while the contract was merely between the debtor and Skinner, the banks by their conduct actually became parties to it, whereby the control and direction of the debtor's business was placed in their hands to the exclusion of the debtor's officers and board of directors, and that Skinner was the agent of the banks in the conduct of debtor's business.

With relation to the additional sums of $17,625 and $15,700, found to be due respectively from the Harris Bank and the First National Bank, the court's theory was that these sums were preferences, that is to say, they amounted to transfers of the debtor's property within four months prior to the filing of its petition, and while the debtor was insolvent. Under such circumstances, if they existed and if there were an adjudication of bankruptcy, the transfers would be void, and the property might be reclaimed and recovered in the bankruptcy court, or in any state court which would have had jurisdiction if bankruptcy had not intervened. Section 60 of the Bnkruptcy Act, 11 U.S.C.A. § 96. However, neither the trustee's nor the debtor's petition claims that these payments constituted preferences within the meaning of that section. The petitions proceed on the theory contemplated in section 67e, 11 U.S.C.A. § 107(e), relating to transfers which hinder, delay or defraud creditors, which does not apply to purchasers in good faith for a present fair consideration. Under circumstances as designated in this section, it was the duty of the trustee, if the facts warranted it, to recover and reclaim the property thus transferred, by legal proceedings or otherwise, for the benefit of the creditors.

We are first confronted with the question of jurisdiction. Both appellants maintain that the federal court was without jurisdiction, and the First National Bank also contends that the court lacked jurisdiction to enter the decree in a summary proceeding as distinguished from a plenary suit. We shall first consider the latter contention, which we think must be sustained as to the First National Bank.

Courts of bankruptcy possess only such jurisdiction and powers as are expressly or impliedly conferred upon them by Congress. Section 2 of the Bankruptcy Act, 11 U.S.C.A. § 11; Taubel-Scott-Kitzmiller Co. v. Fox, 264 U.S. 426, 44 S. Ct. 396, 68 L. Ed. 770. Section 23 of the Bankruptcy Act of 1898 amended, 11 U.S.C.A. § 46, is as follows:

"(a) The United States district courts shall have jurisdiction of all controversies at law and in equity, as distinguished from proceedings in bankruptcy, between trustees as such and adverse claimants concerning the property acquired or claimed by the trustees, in the same manner and to the same extent only as though bankruptcy proceedings had not been instituted and such controversies had been between the bankrupts and such adverse claimants.

"(b) Suits by the trustee shall only be brought or prosecuted in the courts where the bankrupt, whose estate is being administered by such trustee, might have brought or prosecuted them if proceedings in bankruptcy had not been instituted, unless by consent of the proposed defendant, except suits for the recovery of property under section 60, subdivision b [section 96, subdivision b, of this title]; section 67, subdivision e [section 107, subdivision e, of this title]; and section 70, subdivision e [section 110, subdivision e, of this title]."

60b, 11 U.S.C.A. § 96(b), refers to preferences within four months; 67e, 11 U.S.C.A. § 107(e), refers to fraudulent transfers within four months; 70e, 11 U.S.C.A. § 110(e), provides that the trustee may avoid any transfer that any creditor might have avoided. Each of the subdivisions contains the following clause: "For the purpose of such recovery any court of bankruptcy * * * and any State court which would have had jurisdiction if bankruptcy had not intervened, shall have concurrent jurisdiction."

This section has been construed generally to mean that, in absence of consent of the proposed defendants, who are adverse claimants, suits by the trustee can be brought only in the courts where the bankrupt could have brought them had bankruptcy not intervened, except suits for the recovery of property under the sub-sections referred to. Schumacher v. Beeler, 293 U.S. 367, 55 S. Ct. 230, 79 L. Ed. 433; Taubel-Scott-Kitzmiller Co. v. Fox, supra; In re Goldstein, 7 Cir., 216 F. 887; In re Luken, 7 Cir., 216 F. 890. It is not denied that these appellants were adverse claimants (see Harrison v. Chamberlin, 271 U.S. 191, 46 S. Ct. 467, 70 L. Ed. 897), or that the debtor or the trustee did not have actual or constructive possession of that which they sought to reclaim and recover in their suit (see Taubel-Scott-Kitzmiller Co. v. Fox, supra.) True, the court found that the two payments made by the debtor to appellants on or about July 8, 1936, were preferences; but they could not have been preferences under section 60 of the Act, 11 U.S.C.A.§ 96, unless there were a finding of insolvency of the debtor at that time. There is no such finding, nor do appellees claim that insolvency existed at that time.

Furthermore, appellees by their pleadings or otherwise do not claim that these payments were preferences, as defined in section 60 of the Act, but they treat them as transfers within four months prior to the filing of the petition with the intent and purpose on the part of the debtor to hinder, delay, or defraud its creditors, under section 67e, albeit the court made no finding, and there is no evidence to support a finding, that the debtor ever had such an intention or purpose. However, if there were such a finding, based upon substantial evidence, it was the duty of the trustee under section 67e to recover and reclaim the property thus transferred "by legal proceedings or otherwise for the benefit of the creditors." So far as we are advised this clause has never been construed to mean that such a controversy can be determined in a summary proceeding by the bankruptcy court. On the contrary, we think it cannot be so determined, but that resort must be had to a plenary action. Appellees, however, contend that, although the proceeding was summary in character, it was in fact a plenary action, inasmuch as all the evidence which could have been heard in a plenary action was heard. Such fact we think is not always determinative of the question. It would seem that if the ...

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