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In re Teltronics

decided: June 2, 1981.

IN RE TELTRONICS, LTD., AN ILLINOIS CORPORATION, BANKRUPT ; GLENN R. HEYMAN, RECEIVER IN BANKRUPTCY OF TELTRONICS, LTD., AN ILLINOIS CORPORATION, PLAINTIFF-APPELLANT,
v.
GEORGE W. KEMP, JR., RECEIVER IN THE CIRCUIT COURT OF COOK COUNTY, CASE NO. 76 CH 7741, DEFENDANT-APPELLEE



Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 79 C 3572 -- John F. Grady, Judge .

Before Sprecher and Bauer, Circuit Judges, and Campbell, Senior District Judge.*fn*

Author: Bauer

Drawn for battle, a state court receiver and a bankruptcy trustee challenge each other's power over funds of the bankrupt, Teltronics, Ltd. The issue here is whether money held by a state court receiver under the Illinois Consumer Fraud and Deceptive Business Practices Act, Ill.Rev.Stat. ch. 1211/2, § 261 et seq., is property of the bankrupt's estate and thus subject to surrender to the bankruptcy trustee. The district court held that the money was not the "property" of the bankrupt under the Bankruptcy Act, 11 U.S.C. § 11(a)(21)*fn1 , because it was acquired by fraud. We affirm.

I

Dennis Roberts, doing business as Teltronics, Ltd., defrauded thousands of consumers when they responded to magazine advertisements offering digital watches. The watches were never delivered. Roberts collected about $1,700,000 in prepaid orders and absconded with $1,300,000, still not recovered. He was later found guilty of fifty counts of mail fraud.*fn2 18 U.S.C. § 1341.

On December 26, 1976, the Illinois Attorney General filed an action in the Circuit Court of Cook County under the Illinois Consumer Fraud and Deceptive Business Practices Act ("Consumer Fraud Act"), Ill.Rev.Stat. ch. 1211/2, § 261 et seq., against Dennis Roberts, Teltronics, and other defendants.

Section 267 of the Act authorized the Attorney General to seek an injunction in state court to restrain violations of the Act. Id. at § 267. Section 267 also permits the court to appoint a receiver. Id. Circuit Court Judge O'Brien entered a preliminary injunction, freezing about $836,000 held in Teltronic's checking accounts. On January 13, 1977, he appointed defendant-appellee George Kemp as receiver and placed the funds in his possession.

On January 24, 1977, certain business creditors of Roberts d/b/a Teltronics filed a petition for involuntary bankruptcy, asserting claims of approximately $15,000. Bankruptcy Judge James appointed plaintiff-appellant Glenn Heyman as receiver in bankruptcy on December 5, 1977. On December 20, 1977, Teltronics was adjudicated a bankrupt.

On January 20, 1978, the bankruptcy receiver filed a complaint against the state court receiver, seeking turnover of all assets, books, and records of the bankrupt. On June 26, 1979, Judge James entered a judgment in favor of the bankruptcy receiver and ordered the state court receiver to turn over the funds, books, and records. The district court reversed on review, and the bankruptcy trustee appeals.

II

A

The Bankruptcy Act authorizes the bankruptcy court to order a person in possession of property of the bankrupt to turn that property over to the trustee. In particular, section 2(a)(21) of the Act gives the bankruptcy court jurisdiction to:

require receivers appointed in proceedings not under this title to deliver the property in their possession or under their control to the receiver or trustee appointed under this title

11 U.S.C. § 11(a)(21). That power, however, is limited, by definition, to property that is part of the bankrupt's estate. As noted by the district court, it is settled that property obtained by fraud of the bankrupt is not part of the bankrupt's estate. Nicklaus v. Bank of Russellville, 336 F.2d 144, 146 (8th Cir. 1964); In re Paragon Securities Co., 589 F.2d 1240, 1242 (3d Cir. 1978); 4A Collier, Bankruptcy P 70.41 at 484 (14th ed. 1978) (hereinafter "Collier"). Roberts' conviction of mail fraud collaterally estops Teltronics from contesting that fraud occurred here; in any event, appellant does not seriously question the finding of fraud. Parklane Hosiery Co., Inc. v. Shore, 439 U.S. 322, 331, 37 S. Ct. 506, 61 L. Ed. 1148 (1979); Hart Steel Co. v. Railroad Supply Co., 24 ...


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