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In re Bailey's Beauticians Supply Co.

decided: March 9, 1982.


Appeal from the United States District Court for the Northern District of Illinois. No. 80 C 1487 -- Abraham Lincoln Marovitz, Judge.

Before Pell and Bauer, Circuit Judges, and Morgan, Chief District Judge.*fn*

Author: Pell

Bailey's Beauticians Supply Co. (Bailey's) appeals from a district court decision in which the judge concluded that a bankruptcy court had no power, pursuant to the Bankruptcy Act of 1898, 30 Stat. 544 (1898) (repealed 1978), to dismiss an involuntary petition that meets jurisdictional requirements. A related question is whether the district judge correctly reversed the bankruptcy judge's approval of a compromise reached by Bailey's assignee for the benefit of creditors and Century Publishing Company (Century).


On March 29, 1979, Bailey's executed a general assignment of all its assets to Nathan Yorke (Yorke) for the benefit of its creditors. Yorke notified all known creditors of Bailey's both of the assignment and that a sale of the estate would be held on May 22, 1979. Shortly after execution of the assignment, an informal creditors committee was formed. The creditors represented had claims aggregating approximately $900,000. A firm of Certified Public Accountants investigated Bailey's books and records. The creditors committee and its counsel similarly examined Bailey's books, its principal officers, and accounting personnel. Yorke also made collections on the accounts receivable, reducing the secured debt by approximately thirty percent between March and May 21, 1979.

On May 21, 1979, three creditors with claims aggregating slightly more than $50,000 filed an involuntary bankruptcy petition. They moved to restrain the sale. The bankruptcy judge ordered the sale to proceed, subject to court approval. After the sale, all parties agreed that approval should be given. The bankruptcy judge so ordered. On the same day, after notice to all parties, the judge authorized payment and discharge of the secured indebtedness remaining due on the accounts receivable and on an inventory loan.

The creditors committee determined that the estate might have a cause of action against Bailey's parent company, Century, for preferential transfers amounting to $44,000. Century disputed this claim and asserted its own claim against the estate for money loaned and unpaid management fees. The total claimed by Century was over $55,000. The creditors committee and Century reached a settlement of these disputes, subject to court approval. The agreement provided that Century's claims against Bailey's would be subordinated to those of other creditors in exchange for the estate's not pursuing a suit against Century. The committee discovered no other evidence of possible impropriety.

On December 3, 1979, Bailey's moved to dismiss the bankruptcy proceeding and to approve the settlement with Century. The creditors committee strongly supported this motion at the hearing which followed. At the direction of the bankruptcy court, Bailey's prepared a draft order containing detailed findings of fact and conclusions of law. When the petitioning creditors objected to the lack of formal, substantiating evidence, Bailey's requested that they admit or deny, under oath, each finding of fact in the proposed order. The petitioning creditors made no response. On February 8, 1980, the bankruptcy judge approved the Century compromise and dismissed the proceeding. The conclusions stated by the bankruptcy court were that administration of the estate was virtually completed but for the petition and that the interests of the creditors and debtors would be better served if Yorke completed the administration rather than if proceedings on the petition continued.

On appeal to the district court, Judge Marovitz concluded that the bankruptcy judge had no discretion to dismiss the petition but stated that the court was not "unsympathetic to Judge McCormack's salutary attempt to achieve a fair and orderly disposition of this matter outside the more expensive and time consuming formal proceedings provided for under the Act." Judge Marovitz subsequently denied Bailey's motion to alter the judgment to include approval of the Century settlement.


The Bankruptcy Act of 1898, 30 Stat. 544 (1898) (repealed 1978) (Act), governs this controversy. That Act makes no explicit reference to whether a bankruptcy judge has discretion to dismiss a petition for involuntary bankruptcy that is jurisdictionally sufficient on its face. The Bankruptcy Reform Act of 1978, Pub.L.No.95-598, 92 Stat. 2549 (1978), repealed the Act and enacted a new Bankruptcy Code, codified at 11 U.S.C. §§ 101-151326 (Supp. III 1979) (Code). The Code specifically provides that a bankruptcy judge may dismiss a case when the interests of creditors will be served thereby. Id. at § 305(a)(1). Further, section 305(c) provides that such an order of dismissal is not subject to review.

As the appellant has noted, there is ample precedent for construing an existing statute in light of Congressional policies expressed through new legislation. For instance, in United States ex rel. Hintopoulos v. Shaughnessy, 353 U.S. 72, 77 S. Ct. 618, 1 L. Ed. 2d 652 (1957), the Board of Immigration Appeals relied in part on Congressional policies expressed in the Immigration and Nationality Act of 1952 to deny the petitioners' request for suspension of deportation. Although the 1952 Act was inapplicable to the case, the Supreme Court made clear that it was appropriate for the Board to consider the legislation as relevant to the exercise of its discretion:

The second opinion makes clear that the Board still considered petitioners eligible for suspension under the 1917 Act and denied relief solely as a matter of discretion. And we cannot say that it was improper or arbitrary for the Board to be influenced, in exercising that discretion, by its views as to congressional policy as manifested by the 1952 Act.

Id. at 78, 77 S. Ct. at 621 (footnote omitted). Relying on Hintopoulos, the court in In re Eaton Factors, Inc., 3 B.R. 20 (S.D.N.Y.1980), stated: "While the new Code does not control the administration of this case, ... this court may construe the former Act in harmony with the Code, where no explicit inconsistent provision exists." Id. at 23 (citations omitted). Similarly, in In re Seafarer Fiberglass Yachts, Inc., 1 B.R. 358, 361 (E.D.N.Y.1979), the court stated that it was proper to consider the Code "when the result ...

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