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In re National Republic Co.

January 2, 1940


Appeal from the District Court of United States for the Northern District of Illinois, Eastern Division; Michael L. Igoe, Judge.

Author: Sparks

Before SPARKS, MAJOR, and TREANOR, Circuit Judges.

SPARKS, Circuit Judge.

These appeals are taken from orders of the District Court vacating an order granting leave to appellants to answer an involuntary petition in bankruptcy, striking their answer, adjudicating the National Republic Company a bankrupt, appointing a receiver for it, restraining appellants from continuing with a proceeding theretofore instituted by one of them in a state court, and taxing the stenographic charges for reporting the proceedings as costs against two appellants.

Appellants Arbetman and Oppenheimer are the owners of ten and twelve shares respectively of a total of 550,000 shares of the stock of the National Bank of the Republic for the benefit of which all the stock of the National Republic Company was held in trust. Appellant Ballis is a receiver appointed by a state court in a proceeding instituted by Arbetman and joined in by Oppenheimer against the National Republic Company and thirty individuals, charging the latter with fraud,%% misfeasance and malfeasance. Appellee, the Reconstruction Finance Corporation, was the petitioning creditor in the bankruptcy proceeding. Other appellees did not enter appearance or file briefs before this court, hence we shall refer to the Reconstruction Finance Corporation only as appellee.

The Reconstruction Finance Corporation instituted the bankruptcy proceeding on June 5, 1939, by filing an involuntary petition against the National Republic Company, hereafter referred to as the Republic Company or the Company. After the necessary averments as to location and business, it alleged that all the creditors of the Company were less than twelve in number; that appellee was a creditor of the Company having a provable claim against it fixed as to liability and liquidated as to amount, arising out of a judgment for $41,985 rendered in favor of itself in a suit against all the owners of the stock of the Central Republic Trust Company, of which the Company held 419 shares. This judgment remained unsatisfied. It also recited a second claim against the Company arising out of a note for $500,000 signed by the Company and payable to the Central Republic Trust Company, pledged by the latter to appellee but with the understanding, in accordance with an agreement between the Company, the Central Republic Trust Company and the Central-Illinois Company that the Company was not to be liable for any greater amount on the note than the Central-Illinois Company same date for a similar amount, and that the latter Company was ready, willing and able to pay $57,306, hence the Company was liable for the same amount to the Central Republic Company which had pledged the note to appellee. The petition recited the commission of an act of bankruptcy in that while the Company was insolvent or unable to pay its debts as they matured, there had been a receiver appointed by a state court in an action instituted by appellants Arbetman and Oppenheimer. The petition therefore prayed the adjudication of the Company as a bankrupt. At the same time, appellee prayed the entry of an order to restrain the three appellants from interfering with appellee or prosecuting it for contempt of the state court for any alleged violation of a certain order of that court in the fraud suit in which Ballis was appointed receiver, which order purported to restrain all creditors of the Company from proceeding with any action affecting the property belonging to the Company until further order of the court.

Thus these appellants were brought into the bankruptcy proceedings by appellee's petition for a restraining order against them. In response they filed what purported to be the joint and several answer of the Republic Company by its receiver, Ballis, and appellants Arbetman and Oppenheimer. This answer was directed to the bankruptcy petition filed by appellee rather than to the petition for a restraining order - in fact, on subsequent argument counsel for appellants conceded that the pendency of the state court proceeding in no way prevented duly qualified creditors from proceeding against the same party in bankruptcy. Appellants, however, denied the right of appellee to the relief sought by it in the bankruptcy court, claiming, in their answer to the petition for the restraining order, that the bankruptcy petition should be dismissed for the following reasons:

1. Appellee's statements that it was a creditor and held a judgment against the alleged bankrupt were absolutely false and untrue.

2. The allegation that there were less than 12 creditors was untrue, there being over 100 creditors, some of whose names and addresses were given on an attached list. (This list contained the names and addresses of a number of persons who were said to hold outstanding travelers' checks, dividend checks, and cashiers' checks of the National Bank of the Republic, payment of which was alleged to have been assumed by the Company, and other dividend, cashiers' and miscellaneous checks of the National City Bank of Chicago, payment of which was alleged to have been assumed by the Company. Nothing was contained in the answer to show upon what ground this alleged assumption was predicated.)

3. The petition was defective for lack of proper verification by the Reconstruction Finance Corporation.

4. The bankruptcy petition was not filed in good faith, but only for the purpose of divesting the state court of its jurisdiction in the equity suit theretofore filed. Moreover, petitioner itself had prayed the same relief in a similar suit filed in a federal court, asking for the appointment of a receiver, hence petitioner had no right to ground its petition in bankruptcy on the appointment of a receiver.

5. Petitioner has no provable claim upon which to predicate a bankruptcy petition, for the reason that appellants have moved to vacate the judgment entered in the stockholders' liability suit upon which one of the petitioner's claims was predicated, while the other is not liquidated, and moreover, the petitioner is not the legal owner of it, but merely the pledgee.

6.The alleged bankrupt is not insolvent nor unable to meet its debts as they mature.

Appellants were allowed to file this answer which also prayed that appellee's petition in bankruptcy be dismissed and that the relief asked by appellee in its petition for a restraining order should be denied. They also prayed that this answer stand as their joint and several answer to controvert the jurisdictional allegations of the creditor's petition, and demanded a jury trial of such controverted questions.Hearing was had on the petition for a restraining order, during the course of which appellants admitted that they had no right to restrain creditors from proceeding in a bankruptcy action, but they further stated that they desired leave to contest the bankruptcy petition. The court seems to have assumed that they had an absolute right to do so. Thereafter, appellee moved to strike appellants' answer to its petition for a restraining or on the ground that the receiver appointed by the state court, and two alleged stockholders of the Republic Company were not rightful parties in determining the status of the alleged bankrupt, and that they should, therefore, be denied leave ...

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