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In re Norcor Mfg. Co.

January 24, 1940

IN RE NORCOR MFG. CO.; SCHMITT
v.
NORCOR CO. ET AL.



Appeal from the District Court of the United States for the Eastern District of Wisconsin; Ferdinand A. Geiger, Judge.

Author: Major

Before SPARKS, MAJOR, and KERNER, Circuit Judges.

MAJOR, Circuit Judge.

This is an appeal from an order of the District Court entered January 17, 1939, with reference to certain claims filed in a reorganization proceeding under Section 77B of the Bankruptcy Act, 11 U.S.C.A. ยง 207.

The claims involved are those of appellant Schmitt, appellee Norcor Company, and appellee Martin Carlstein. A Special Master recommended allowance of the Schmitt claim in the sum of $70,331.58, which was reduced by the court and allowed in the sum of $50,514.67. The claim of the Norcor Company was recommended for allowance and allowed by the court in the sum of $65,016.73. Appellant Schmitt concedes this claim in the sum of ?13,331.13. The claim of appellee Carlstein was recommended for allowance in the sum of $6,927.14, which recommendation was approved by the court. It is urged that this claim should have been desallowed in its entirety, and in any event, should not have been allowed in an amount in excess of $750.

The claim of appellant Schmitt is predicated upon a written contract entered into June 3, 1929 with the Norcor Manufacturing Company (formerly Northern Corrugating Company), the debtor corporation (also referred to as the "Manufacturing Company"). By the terms of this contract, the Manufacturing Company agreed to pay Schmitt a certain stipulated royalty for the exclusive right to manufacture and sell chairs, on which Schmitt had pending an application for a patent. The contract was to run for a period of three years, or until June 1, 1932, and under certain conditions was to continue for an additional year, or until June 1, 1933. The conditions mentioned were complied with and there is no dispute but that the contract was in effect until the latter date. The rights of the parties arising from this contract have been the source of much litigation. On three occasions the matter has been before the Supreme Court of Wisconsin. Acme Chair & Metal Crafts Co. v. Northern Corrugating Co., 209 Wis. 8, 18, 243 N.W. 415, 244 N.W. 582; In re Norcor Mfg. Co., 223 Wis. 463, 271 N.W. 2. Also before this court In re Norcor Mfg. Co., 7 Cir., 97 F.2d 208. A detailed statement of the facts may be found in those cases.

On June 28, 1932, Herman W. Krueger, the principal stockholder, President and Director of the Manufacturing Company, and other directors of said corporation, in the State Court of Wisconsin, confessed the insolvency of said corporation and agreed to the appointment of receivers. They were appointed with authority to carry on the business and, all creditors, including Schmitt, were enjoined from taking further action on their claims. By the decisions of the Supreme Court of Wisconsin, supra, Schmitt was adjudicated to have a valid claim antedating the receivership in the amount of $45,812.30, and $4,702.37 against the receivers, or a total claim of $50,514.67, the amount allowed by the District Court in the instant matter.

This adjudication included the amount due Schmitt under the terms of the contract from June 1, 1929 until June 1, 1933. While, by the terms of the contract, it was automatically extended the fourth year, June 1, 1932 to June 1, 1933, it is conceded there is noting in the terms of the contract by which it was expressly continued subsequent thereto. Thereafter, however, the receivers continued the manufacture of the product descrbed in the contract, which constituted the major portion of its business. During this period, as before, the receivers enjoyed the sole and exclusive right in this respect, and also during this time Schmitt was enjoined from prosecuting any claim for such use.

The amount of the claim in dispute, $19,816.91, recommended for allowance by the Special Master, but disallowed by the court, is the sum which Schmitt claims as royalty for the use of his invention subsequent to the expiration of the contract. The position of appellees is to the effect that, after the expiratio of the contract, Schmitt was not entitled to royalties for the use by the receivers of his invention. It is argued his claim in this respect was based upon infringement and, that the Special Master had no jurisdiction to consider such a claim. The Master, in deciding against this contention, said: "I am of the opinion that this is fair and requitable and that the receivers were operating under an implied contract to pay the same. * * * I find that after the expiration of the fourth year of the Schmitt contract, that claimant is entitled to 5% of the involce of the chairs made and sold by the receivers."

As authority for this conclusion, the Master cites In re Michigan Motor Specialties Co., D.C., 288 F. 377, Schiff v. Hammond Clock Co., 7 Cir., 69 F.2d 742, Schall v. Camors, 251 U.S. 239, 251, 40 S. Ct. 135, 64 L. Ed. 247. By reason of these authorities and the circumstances presented, we are satisfied the Master reached the proper conclusion.

We do not think the opposing contention is sustanined by any authorities to which our attention has been called, and certainly it is not sustanied by logic or equitable consideration. When the receivers were appointed in the State Court, they retained as active amnager the same person who had theretofore acted in that capacity and who was also the principal stockholder and President of the company. They had knowledge of the contract - in fact, worked and complied with its terms until its expiration. Prior thereto, Schmitt had been enjoined from taking any action looking toward the protection of his rights. The receibers continued, after the expiration of the contract, to manufacture the product the same as they had before. We see no reason why he should not be entitled to reasonable compensation for the use of his property, his invention. No question of infringement was involved - the estate is liable under the circumstances by reason of an implied contract.

The Master, in determining the reasonable compensation, properly took into consideration the five per cent royalty agreed to be paid under the contract. There seems to be no occasion, however, to consider just how and in what manner the Master reached his decision as to the amount allowed for the reason that, under the contentions presented, the reasonableness of the allowance is not in question. It follows that the court erred in sustaining objections to the Master's report as to this claim and, that the claim should have been allowed as recommended by the Master.

We shall now consider the respective contentions with reference to the claim of the Norcor Company (not to be confused with the Norcor Manufacturing Company). Few, if any, of the facts in connection with this claim have been related in the opinions of the Supreme Court of Wisconsin, nor in the opinion of this court to which we have heretofore, referred. It seems important, therefore, to give a more detailed statement of the facts than was necessary in connection with the Schmitt claim.

Krueger, as stated, was the principal stockholder, President, Director and Manager of the Norocr Manufacturing Company. About ten months subsequent to the appointment of the receivers in the State Court, Krueger, in the presence of one Spiegel, his plant superintendent, employed one Otto P. Lehner, an attorney, for the purpose of reorganizing the debtor corporation. Lehner was furnished with a list of creditors, financial statements and other data pertinent to the situation. At the suggestion of Lehner, Krueger assigned his controlling stock of the debtor corporation to Frank Cota and, a written agrement was entered into between Krueger and Lehner. Neither Krueger nor Lehner was able or willing to produce this contract or a copy thereof before the Master, and its provisions are a matter of dispute. Almost immediately thereafter, Lehner commenced sending letters to the debtor's numerous creditors, representing that a number of business men were interested in effecting a reorganization of the debtor, and offering to purchase their claims at from ten per cent in cash to thirty per cent debentures, depending upon the amount of the claim. This offer was followed by numerous other letters signed by Lehner as "Attorney for ...


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