In re Cook, 6589.

• Decision Date: 30 December 1938
• Docket Number: No. 6589.,6589.
• Parties: In re COOK et al. FAHEY et al. v. COOK et al.
• Court: U.S. Court of Appeals — Seventh Circuit

101 F.2d 394 (1938)

In re COOK et al.^*

FAHEY et al. v. COOK et al.

No. 6589.

Circuit Court of Appeals, Seventh Circuit.

December 30, 1938.

Harry J. Myerson, of Chicago, Ill. (Charles R. Aiken, of Chicago, Ill., of counsel), for appellants.

Meyer Abrams, of Chicago, Ill., for appellee Emma Dvinsky.

William M. Klein, Samuel E. Hirsch, L. C. Jasseph, and Julian H. Levi, all of Chicago, Ill., for appellees Wm. C. Cook et al.

Ralph R. Hawxhurst and Bernard Hoban, both of Chicago, Ill., for appellee Ralph Hubbart, trustee.

Before SPARKS, MAJOR, and TREANOR, Circuit Judges.

SPARKS, Circuit Judge.

This appeal presents the question of the jurisdiction of the court over reorganization proceedings instituted by the members of a bondholders' protective committee against whom an action had been brought in a state court for the appointment of a receiver to operate the property of the alleged debtor, and for an accounting. Appellants are the receiver appointed by the state court, and a group of persons holding less than 5% of the certificates of deposit "protected" by the committee, who had instituted the state court proceedings and who sought and were denied leave to intervene in the proceedings under section 77B, Bankr. Act, 11 U.S.C.A. § 207, to controvert the allegations of appellees' petition. The District Court approved the petition as properly filed, and in good faith, and refused to permit appellants to be heard in contravention of its allegations, or to file their petition to dismiss the petition and for other relief. The court also refused to allow appellants an appeal from its rulings. We allowed the appeal for the reason that it appeared from the facts presented by the petition for appeal that a jurisdictional question was involved as to whether or not the alleged debtor was an entity capable of or entitled to reorganization under section 77B, and that there was a substantial question as to whether or not the parties seeking to participate in the proceedings were entitled to do so.

At the outset we are confronted with a controversy between the parties as to the scope of the appeal. Appellants state in their brief: "This is an appeal from orders of the District Court approving the voluntary petition for corporate reorganization of * * * (appellees), appointing a trustee, and denying appellants' petition to dismiss the proceedings as a fraud upon the court and for lack of jurisdiction and good faith, and to restore possession of the property wrongfully taken from the State Court receiver." Appellants filed their petition for appeal in this court on February 28, 1938, from "the order of February 15, 1938, and all prior orders." In view of the situation set forth in the petition, we considered it permissible to allow the appeal as prayed, and it was therefore the intention of the court to grant the appeal from all orders entered by the District Court within the period of thirty days prior to the petition for appeal in order to enable this court to review the question of the right of appellants to participate in the proceedings as to all orders of which they complained, as well as to determine the validity of those orders. Although the assignments of error do not specify the orders complained of by date of entry, they refer to those by which appellants describe their appeal, and we consider the appeal as to them, with the exception of the order appointing a permanent trustee which was entered February 21, and of course is not included in the appeal "from the order of February 15, and all prior orders."

The proceedings here involved were instituted on January 25, 1938, by the filing of a voluntary petition for reorganization under section 77B of the Bankruptcy Act. The petition was filed by appellees Cook, McClellan, and Knutson who described themselves as "Trustees under Bondholders Protective Agreement dated September 21, 1928, relating to West Pines Apartments, a corporation, * * * and Debtor * * *." They alleged that the debtor was a business conducted by trustees wherein beneficial interest and ownership was evidenced by written instruments, and having its principal place of business at an office address in Chicago, and its principal assets in the city of Joliet, Illinois, and that a great number of its creditors were located in Chicago; that the debtor was organized in September 1928, by an agreement between the committee and the owners of $198,500 of $200,000 bonds issued by Mary L. Walker, according to which agreement the owners deposited their bonds and received therefor certificates of deposit constituting written instruments by which beneficial interest and ownership of the debtor were evidenced.

The petition further recited that thereafter a foreclosure proceeding was filed by the indenture trustee, and upon sale, the debtor bid in the property for the sum of $237,864, applying in payment thereof, the deposited bonds, plus $39,364 in cash; that on June 14, 1930, upon expiration of the period of redemption, the debtor had the master's deed to the premises issued and delivered to a trust officer of the indenture trustee and later to the trustee itself which had continued to hold the title in trust subject to the direction and control of the committee as beneficiaries; that a Chicago real estate firm took over the management of the premises and operated the building until the appointment of appellant Fahey as receiver by the state court on November 8, 1937, in the proceedings instituted by appellants Koehler and others; that in order to obtain sufficient funds to discharge debtor's indebtedness of $64,069 and purchase certificates of deposit in the face amount of $38,000 both of which the debtor had an option to do for the sum of $33,500, the debtor borrowed $38,000 from the Investors Syndicate of Minneapolis, giving its note therefor dated June 20, 1935, payable in installments of $964.82 quarterly on principal and interest from September 20, 1935, to June 20, 1950; that payment was duly made until the installment due December 20, 1937, upon which the debtor was forced to default for the reason that possession of its property was then in the hands of the state court receiver who refused to pay although there were funds on hand with which to make payment, hence the debtor was in danger of the acceleration of the entire principal of the note and foreclosure of the trust deed.

In addition to this indebtedness of the debtor, the petition recited (without specifying any amount) that it was indebted to the trustees as individuals for fees for services rendered under the deposit agreement, and for expenses and attorneys' fees incurred by them as trustees, which they as debtor were unable to discharge; that one Mains, an attorney, had, on June 4, 1930, filed an action in the state court praying foreclosure of an alleged attorney's lien on the debtor's property, and that action was still pending, as was an action filed by Mrs. Walker in August, 1938, relating to the property and based upon issues alleged to have been disposed of by prior proceedings.

Relying on its inability to discharge the debts set forth above, and the fact of the pending state court litigation, the debtor prayed that the federal court assume jurisdiction over itself and its property, either restoring it to possession or appointing a trustee to operate it. It also prayed that appellants Koehler and others, Mains, and Mrs. Walker be restrained from proceeding further with the various causes instituted by themselves in the state court. Preliminary injunction issued and the matter was set for hearing on January 28, 1938. Appellant Koehler, the owner of a certificate of deposit of one $500 bond, filed answer denying that she and her attorneys were attempting to take any action that would impair the assets of the West Pines Apartments, but stating on the contrary that their action was to prevent Cook and McClellan from interfering with proceedings affecting the $38,000 mortgage placed upon the property by Cook without the knowledge or consent of any of the bondholders, and that when Cook learned that he might be held personally liable for the debt, appellant and her attorneys were informed that he contemplated taking action to compel the recognition of the mortgage.

Upon hearing of the petition on January 28, appellants' objections to its approval were overruled on the ground that the objectors were not creditors, and they did not constitute...