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Chatz v. Freeman

May 18, 1953


Author: Finnegan

Before MAJOR, Chief Judge, and FINNEGAN and SWAIM, Circuit Judges.

FINNEGAN, Circuit Judge.

The plaintiff-appellee, as Trustee in bankruptcy of Garland Construction Company, debtor, filed this action in the United States District Court for the Northern District of Illinois, on May 15, 1952. He named among other defendants, Harry Freeman and Kernal Freeman, appellants, who are co-partners, doing business as Freeman & Freeman.

By the complaint, plaintiff, as trustee of the corporate bankrupt, seeks an accounting from said defendants and a disclosure of all their transactions and dealings with the Garland Construction Company, the bankrupt corporation, and asks for an order restraining and enjoining defendants from transferring, encumbering or in any maner disposing of their interests in certain property, held in trust and otherwise, and further restraining them from transferring, paying out or in any manner disposing of any funds pertaining to any construction loans or projects in which the bankrupt may have an interest, until the further order of the court.

In this appeal Freeman & Freeman seek to reverse the order of October 1, 1952, issuing a temporary restraining order, because no provision was made therein requiring appellee to give the security provided for in rule 65(c) of the Federal Rules of Civil Procedure, 28 U.S.C.A. Rule 65(c) provides as follows:

"No restraining order or preliminary injunction shall issue except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained. No such security shall be required of the United States or of an officer or agency thereof. As amended Dec. 27, 1946, effective March 19, 1948."

As to defendants, Freeman & Freeman, the complaint alleges in substance that the Bankrupt, Garland Construction Company, has been engaged in the acquisition of parcels of land in various suburbs of the Chicago area, and the erection thereon of small homes; that on or about February 15, 1950, the Bankrupt corporation retained the defendants, Harry Freeman and Kernal Freeman as its attorneys; that plaintiff is informed and believes that, commencing February 17, 1950, and prior to August 15, 1950, Freeman & Freeman advanced to the Bankrupt corporation the sum of $8,300 as a loan to assist in its operations and, thereafter, loaned and advanced various other sums; that in return for such cash advances by Freeman & Freeman the Bankrupt corporation transferred virtually all of its assets to them; also on information and belief, the plaintiff charges that although the Bankrupt paid the consideration therefor, Freeman & Freeman became the beneficial owners of certain parcels of real estate located in DuPage County, Illinois, Lake Zurich and Mundelein, Illinois, which were held in trust by the Central National Bank of Chicago; that in furtherance of a plan, Freeman & Freeman secured from the Bankrupt an assignment to them of all moneys out of various construction loans and mortgages due to Bankrupt for certain improvements it had built upon said lots; that acting under an instrument of assignment, Freeman & Freeman collected from various lending and banking institutions, and from an insurance company, a total of $89,221.99 while they loaned to the Bankrupt corporation only the sum of $43,750; that subsequent to the filing of the Petition in Bankruptcy Freeman & Freeman withdrew moneys from loan accounts maintained by S. Yondorf & Company, and that there are undistributed loan balances with said company, which although assigned to Freeman & Freeman, rightfully belong to the Bankrupt; that Freeman & Freeman are now operating the Wheaton Subdivision, a prosperous enterprise, in which the Bankrupt had invested $25,000; that by virtue of their transactions with the Bankrupt, Freeman & Freeman have profited and will profit to an extent in excess of $100,000, and that all transfers of property from the filing of the Petition in Bankruptcy, are fraudulent against the Bankrupt's creditors within the purview of sec. 67, sub. d(2) of the Bankruptcy Act, 11 U.S.C.A. ยง 107, sub. d(2), and should be set aside.

In their answer to the complaint, defendants Freeman & Freeman, deny that the parcels of real estate were ever the property of the Bankrupt or that the Bankrupt had ever paid any part of the consideration for said property, but aver that said property was paid for entirely by Harry Freeman and Kernal Freeman; they deny that they ever received from the Bankrupt any moneys in excess of what they loaned to it, and allege that in truth and in fact, at the time of the filing of the Petition in Bankruptcy, the Bankrupt was indebted to Freeman & Freeman in an amount in excess of $42,000.

Plaintiff contends: (1) that Rule 65(c) is not applicable to the instant case because it is inconsistent with the Bankruptcy Act; (2) that in a court of bankruptcy, the court may dispense with an injunction bond being given by a trustee in bankruptcy in a plenary suit.

In his brief and on oral argument in this court, plaintiff, in support of his first contention, argues that this plenary suit is a bankruptcy proceeding brought in a Bankruptcy Court under authority of sec. 67, sub. e, of the Bankruptcy Act.

Section 67, sub. e, sec. 107, title 11 U.S.C.A., provides:

"For the purpose of any recovery or avoidance under this section, where plenary proceedings are necessary, any State court which would have had jurisdiction if bankruptcy had not intervened and any court of bankruptcy shall have concurrent jurisdiction."

Appellee then cites Rule 81(a)(1) of the Federal Rules of Civil Procedure, which provides as follows:

"(a) To What Proceedings Applicable.

"(1) These rules do not apply to proceedings in admiralty. They do not apply to proceedings in bankruptcy or proceedings in copyright under Title 17, U.S.C. except in so far as they may be made applicable thereto by rules promulgated by the Supreme Court of the United States. * * *"

The Supreme Court promulgated General Orders in Bankruptcy and number 37 of said General Orders, 11 U.S.C.A. ...

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