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In re Portage Wholesale Co.

July 17, 1950


Author: Swaim

Before KERNER, FINNEGAN, and SWAIM, Circuit Judges.

SWAIM, Circuit Judge.

This case comes to us as an appeal from an order of the District Court for the Western District of Wisconsin, which affirmed the order of Referee in Bankruptcy, Miles C. Riley, appointing George L. Devine trustee of the estate and effects of Portage Wholesale Company, bankrupt, and also provided that the appellant, Vaughn S. Conway, not be permitted to practice in that court until he had made an apology to the referee and that apology had been accepted.

This appeal questions (1), the validity of the election of Devine as trustee of the bankrupt, and (2), the validity of the order of the District Court prohibiting the appellant, Conway, from practicing in that court until he had apologized to the referee and his apology had been accepted.

On January 7, 1949, at the first meeting of the creditors after the adjudication of bankruptcy, Devine was declared elected trustee of the bankrupt. Conway claims to have cast in excess of 140 votes for one Earl S. Mullen, Aggregating claims of $123,000, whereas only 30 votes, aggregating claims of $52,000, were cast for Devine. Of the votes cast by Conway under powers of attorney, all were challenged with the exception of 16 because of insufficiency in form under General Order in Bankruptcy 21(5), 11 U.S.C.A. following section 53. and all were challenged because of the manner and method of their procurement by Conway. These powers were challenged by John T. Harrington, who had been acting as one of the attorneys for the receiver of the debtor in proceedings under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq. The powers challenged as to form were executed by corporations or partnerships and did not contain a sworn statement by the person executing such powers that such person was a member of the partnership or a duly authorized officer of the corporation on whose behalf he acted, as required by General Order 21(5). In most of these powers of attorney, the jurat did contain a statement of the notary that the one executing the power of attorney was an officer of the corporation for which the power of attorney was being executed. In In re Saslaw, D.C., 275 F. 587, the court upheld the action of a referee in refusing to permit a person holding such a power of attorney to vote. In discussing the powers of attorney there in question the court said, 275 F. at page 588:

"Those executed by partnerships are proved before an officer qualified by paragraph 5; they contain the allegation that deponent is a member of a partnership, but the officer taking the proof makes no statement over his signature that the deponent was personally known to him, or that his identity was established. Those instruments executed by corporations are proved before a qualified officer, but contain no allegation that the officer executing it is duly authorized to act on behalf of the corporation (in executing the power), and do not contain a statement by the officer taking the proof that the deponent was personally known to him, or that his identity was established.

"The fact that the deponent in the corporation proofs swears that he is the treasurer of the corporation is not sufficient in my opinion; there is no implication that a treasurer is duly authorized to execute powers of attorney. Furthermore, paragraph 5 of General Order XXI expressly requires that the officer swear that he is duly authorized, not that he is merely duly elected, or that he is the treasurer."

In our opinion the referee correctly refused to permit Conway to vote under the corporate and partnership powers of attorney which did not comply with General Order 21(5). While this objection may seem technical, matters of vital importance to the creditors are determined in meetings of creditors where these proxies are to be voted. Matters so determined and acted upon should not be lightly set aside. It is understandable, therefore, why it was thought important to require the sworn statement of the person executing such a proxy that he had been authorized to execute it.

At the time of the election the referee in his order stated: "In my mind the objections to the powers of attorney, is not so much to the form, even though these have real substance, but the more penetrating objection relates to the matter and means of soliciting powers and proxies."

This latter objection to Conway's corporate powers of attorney is supported only by appellee's Proposition Three, that powers of attorney are invalid when solicitation thereof is by an attorney for the bankrupt. This Proposition would state a valid objection to these powers of attorney if Conway had been the attorney for the bankrupt. It is true that long before the bankruptcy proceeding was started, Conway had done some legal work for the bankrupt, but throughout the Chapter XI proceedings, which had been in progress approximately two years at the time the election of the trustee was held, the bankrupt had been represented by other attorneys. The record plainly discloses that throughout those proceedings, Conway was a creditor of the bankrupt, represented many other creditors of the bankrupt and had been antagonistic to the bankrupt and to Jake Marachowsky, who owned the controlling interest in the bankrupt corporation and other related corporations.

In the appellee's argument under this Proposition, objection is also made to statements in certain letters which Conway wrote to creditors of the bankrupt soliciting powers of attorney. The trustee points out that the statement of Conway in one of his letters that he was instrumental in the recovery of $25,000, being the deposit of the bankrupt, is "misleading." In these letters Conway did mention the fact that he had made a motion to impound the $25,000 deposit of the bankrupt as shown by the transcript of proceedings before the referee. The fact that Conway did make such a motion is shown by the transcript of the creditors' meeting of August 17, 1948.

In one of Conway's letters he said that he was instrumental in developing an offer of $254,000 for the Portage Wholesale Company assets. The trustee in his brief says that was not true; that no such offer was made; and that the only offers before the Court were the debtor's two offers. We do not have before use a record which shows all that happened before the referee below. We do have the statement of the District Judge in his order of October 29, 1948, in which the Court said that after the amended offer of $150,000 was made, "An increase of $25,000 to that offer was made, after Marachowsky learned that others would pay $210,000 for the assets of the debtor company if it were adjudicated a bankrupt." The judge evidently recognized the effect of such offers on the action of the bankrupt although the trustee in discussing this matter would have us ignore such higher offers because, "under the provisions of the Bankruptcy Act, Chapter 11, Art. 2, [11 U.S.C.A. § 706 et seq.], all proposals of arrangement must be made by the debtor, and the only offer that the debtor made and the only offer before the Court was the debtor's first offer of $150,000.00, and its second offer of $175,000.00."

The trustee also charges that in one of the letters Conway stated that "Jake Marachowsky gained the confidence of the Referee and that it was impossible to overcome that in spite of all that was happening", and that this statement is not borne out by the record. A careful investigation and consideration of all of the record we have in this case disclosed many matters which transpired in the receivership while it was under the supervision and direction of the referee and which are difficult for us to understand. Many such matters are described in Conway's letters and his statements concerning them are not challenged by the appellee.

In his letter of December 18, Conway stated: "In as much as this proceeding has been quite a mess due to Jake Marachowsky's activities, and what he got away with, the Bankruptcy proceeding is going to be rough. Every attempt will be made to keep the present Receiver and Attorney in, and to do as much as possible to keep the lid from blowing off."

In his letter of December 17, 1948, Conway stated: "The Referee announced at one time that the Receiver had accumulated $42,000 in cash. That is all gone. Jake Marachowsky swindled the Receivers out of $46,000 worth of gas and oil and never paid anything for it. The Attorney for the Receiver did garnishee and tie up about $12,000 for this, but $4,200 of this is to make good the bum checks that Jake gave the Receiver * * *."

And again in the same letter:

"The warehouse stock on hand of $112,000 when this company first filed (January 21, 1947) has now dwindled to less than $50,000.

"Of course Jake Marachowsky Stores Company account that was about $80,000 when this company went in, is now up to better ...

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