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In re National Realty Trust. Sullivan

March 2, 1948


Author: Major

Before MAJOR and KERNER, Circuit Judges, and LINDLEY, District Judge.

MAJOR, Circuit Judge.

This is a proceeding instituted under Sec. 77B of the Bankruptcy Act, Title 11 U.S.C.A. § 207, sub. a, in which an involuntary petition for reorganization of the debtor was approved May 24, 1935.*fn1 Subsequently, certain sections of Chap. 10, Title 11 U.S.C.A. § 501 et seq., were made applicable.*fn2

The debtor is a common law trust formed under the laws of Illinois, pursuant to a Declaration of Trust dated July 2, 1930. During the course of the reorganization proceedings vacancies occurred in the office of the debtor's trustees and the court on September 16, 1947 entered an order appointing Leslie H. Klawans and Benjamin G. Kilpatrick as such trustees, with all the powers, duties and obligations provided in the Declaration of Trust. George D. Sullivan, the only trustee under the said Declaration, appeals from such order.

While numerous issues are raised and discussed before this court, we are of the view that the sole question for decision is whether the District Court had the jurisdiction and power to enter the order in controversy.

We think it is unnecessary to indulge in any extended recitation of the facts of this long and involved proceeding. It will be sufficient to refer to those which bear upon the question for decision. The Declaration of Trust, so far as here material, provides:

"The Trustees hereunder shall be three (3) in number until a different number shall be fixed by the Trustees as hereinafter provided, provided, however, that there shall never be less than two (2) Trustees hereunder. The Trustees then in office at any time and from time to time may appoint new and additional Trustees or remove any existing Trustee with or without cause. * * *

"In case of any vacancy of the Trustees occurring by the death, resignation, removal or disability or for any other reason, a new Trustee or Trustees shall be appointed by the remaining Trustees. Upon the filing with the then acting Depositary of this Declaration of Trust of (1) a certificate of such election signed by the President and Secretary of the Trust and (2) a written acceptance of this Trust signed by the newly elected Trustee, title to the trust estate shall vest in such newly elected Trustee together with the Trustee or Trustees then holding office without any further act or conveyance."

The instant controversy arose because of a situation called to the attention of the court by a petition filed July 28, 1947, by George Sullivan and J. Frank Higgins. The petition recited, among other things, the provisions of the Declaration of Trust relative to the manner of selecting trustees, and set forth in detail those who had served as trustees and successor-trustees from the inception of the trust. It is unnecessary to mention those who served in the earlier years of the trust. It is sufficient to note that on December 20, 1939, Paul Darrow, George Sullivan and Max Levy were elected and became the trustees. Darrow at that time was also serving as the court's trustee, in possession of the debtor's property. Subsequently he resigned and has since been charged with malfeasance in office. Darrow also resigned as the debtor's trustee, and Max Levy died, which left George Sullivan (appellant) as the sole trustee. The petition alleges:

"That on June 9, 1946, that petitioner, George Sullivan, as the sole surviving trustee, held a meeting at which J. Frank Higgins was elected as Trustee, president and treasurer of said Trust, and that your petitioner, George Sullivan, and your petitioner, J. Frank Higgins, now constitute the Trustees of said Trust."

The stated purpose of the petition was to obtain the approval and consent of the court to the election of Higgins as trustee "and for such other relief as to the court may seem pertinent and proper."

We mention this general prayer for relief, as appellees place great reliance thereon as the source or basis for the court's power to appoint trustees. Objection was made to the prayer of the petition, and the court indicated that it would not approve of the appointment of Higgins, although no formal order was entered to that effect. The court suggested that the parties get together and agree on a number of persons who would be satisfactory to all concerned, from which the court might appoint two. The parties did meet and agreed on five names, or at any rate some of the parties so agreed, which names were submitted to the court, including the names of the two persons subsequently appointed. Much is said concerning what transpired in connection with the selection and submission of these names, and it is intimated that counsel for Sullivan was and is estopped from questioning the court's authority, either below or on this appeal. We need not attempt to unravel the somewhat confused record in this respect because, in our view, it is immaterial. It does appear that counsel for Sullivan participated in some of the conferences during which the names were selected, but it also appears that he at all times insisted that the court was without jurisdiction or at any rate without power to name trustees.

In support of the order, appellees contend that the court, after refusing to confirm the appointment of Higgins, had the power under the prayer for general relief to appoint anybody it desired. The court must have been of this view because it refused a request by Sullivan's counsel to withdraw his petition. Appellees argue in one breath that under the Declaration of Trust Sullivan was without power to select Higgins as a co-trustee and in the next breath that his request for court approval of such election invested the court with jurisdiction. We agree that under the Declaration Sullivan as the sole surviving trustee was without authority to elect a co-trustee, and that Sullivan had no authority in his official capacity to represent the trust estate in the management or conduct of its business. Thus, assuming that Sullivan was without authority to elect a co-trustee, it would seem that he was also without authority to seek court approval, and such approval if it had been obtained would have been of no effect.

On the other hand, if Sullivan had the authority under the Declaration to select a co-trustee, no court approval would have been required. In arguing to the contrary, appellees rely upon Sec. 191, which provides:

"A trustee or debtor in possession may employ officers of the debtor * * *. No person shall become an officer or director of the debtor, to fill a vacancy or otherwise, without the prior approval of the court."

This section by its terms applies only where the debtor is left in possession of its property. It has been so held. In re J. P. Linahan, Inc., 2 Cir., 111 F.2d 590. Obviously, the purpose of this requirement is to give the court some control over the debtor when left in possession of its property, because in that instance the debtor becomes the court's trustee. Sec. 588; In re Wil-Low Cafeterias, Inc., 2 Cir., 111 F.2d 83, 84; In re Walker et al., 2 Cir., 93 F.2d 281, 283.

There is no provision in the Bankruptcy Act which requires court approval of a debtor official elected to fill a vacancy where the debtor has been deprived of and its property has been placed in the possession of a court trustee, as was done in the instant situation. Sullivan, being without authority to act either on behalf of the debtor or the certificate holders, could not affect their rights by his petition, and neither could he confer either expressly or by implication any power or authority on the court which it did not otherwise possess. And it is immaterial whether the court approval sought by Sullivan was occasioned by an erroneous view of the law or as a matter of precaution. As already stated, Sullivan's counsel denies that he agreed to the action of the court in appointing trustees, and we think the record sustains ...

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