Finkelstein v. Keith Fabrics, Inc.

• Decision Date: 23 May 1960
• Docket Number: No. 17957.,17957.
• Parties: Hyman B. FINKELSTEIN, Samuel Finkelstein and Rifkin and Scharf Corp., Appellants, v. KEITH FABRICS, INC., d/b/a Mae Fabrics, Alleged Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

278 F.2d 635 (1960)

Hyman B. FINKELSTEIN, Samuel Finkelstein and Rifkin and Scharf Corp., Appellants, v. KEITH FABRICS, INC., d/b/a Mae Fabrics, Alleged Bankrupt, Appellee.

No. 17957.

United States Court of Appeals Fifth Circuit.

May 23, 1960.

COPYRIGHT MATERIAL OMITTED

George F. Meister, John A. Fitzsimmons, Miami, Fla., Smathers, Thompson & Dyer, Miami, Fla., of counsel, for appellants.

Albert I. Gordon, Tampa, Fla., Irwin S. Gars, Miami, Fla., for appellee.

Before HUTCHESON, BROWN and WISDOM, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

The principal question presented is whether the posting of a bond under § 69 of the Bankruptcy Act is essental to give rise to a liability for costs, attorney fees and damages and vest the Bankruptcy Court with summary jurisdiction to hear and determine the demand against petitioning creditors for the wrongful appointment of a receiver. Brought here as an appeal from an order of the District Court denying a petition to allow the late filing of a petition of review, the case may also involve the subsidiary issue of an abuse of the Court's discretion.

For our purposes, the facts may be severely compressed. The Petitioning Creditors (now appellants) on December 16, 1958, filed an involuntary bankruptcy petition against the Bankrupt corporation (appellee). The Petitioning Creditors also filed simultaneously a separate application for appointment of a receiver. A receiver was appointed, and he took immediate possession of the Bankrupt's retail stock of merchandise. The order did not, as called for in § 69, 11 U.S.C.A. § 109, require a bond by Petitioning Creditors. Within two days, Bankrupt on December 18 moved to vacate the order because of the failure to post a bond. After adjourned hearings on the Bankrupt's motion, the Referee, by order of December 24, required the posting of a $10,000 bond by December 29. No bond was ever filed. The Bankrupt also filed an answer to the bankruptcy petition denying insolvency and the occurrence of acts of bankruptcy. On December 30, 1958, the Referee, by order, found that the Bankrupt was solvent and that the acts complained of did not constitute acts of bankruptcy. That order expressly vacated the prior appointment of the Receiver, directed the return of the property to the Bankrupt, dismissed the petition in bankruptcy and provided that "jurisdiction is hereby retained to grant such other relief as shall be appropriate."

On February 5, 1959, the Bankrupt filed a petition with the Referee seeking counsel fees, expenses and damages resulting from the seizure of the property by the Receiver. Hearings were held on February 6 and April 7, 1959, at which Petitioning Creditors were represented by counsel, evidence was adduced, and arguments were made. No objection to the jurisdiction of the Bankruptcy Court was made at any time, either at the outset or prior to or at the time of the Referee's final order of April 27, 1959. That order, which until set aside has the force of a court's decree,¹ found the receivership to have been wrongful and awarded Bankrupt $19,000 in damages plus $10,000 in counsel fees. The then counsel for Petitioning Creditors had actual notice of this order not later than May 8, 1959, and Petitioning Creditors had personal notice not later than May 22. They were unable to contact their counsel until June 15. On June 22 new (and present) counsel for Petitioning Creditors filed the petition for leave to file the Petition of Review. After hearing and argument this was denied June 26, 1959.

We agree with Petitioning Creditors that the District Court had the power to receive and grant the petition for leave to make a late filing of the Petition for Review. The time fixed as a matter of right is "within 10 days after the entry" of an order of the Referee. § 39, sub. c, 11 U.S.C.A. § 67, sub. c. But the section permits this to be enlarged to a date "within such extended time as the court may for cause shown allow." This is not a restriction on jurisdiction. "We do not think Section 39, sub. c, was intended to be a limitation on the sound discretion of the bankruptcy court to permit the filing of petitions for review after the expiration of the period. The power in the bankruptcy court to review orders of the referee is unqualifiedly given in Section 2(10). The language quoted from Section 39, sub. c, is rather a limitation on the `person aggrieved' to file such a petition as a matter of right." Pfister v. Northern Illinois Finance Corp., 1942, 317 U.S. 144, at page 153, 63 S.Ct. 133, 139, 87 L.Ed. 146, 153; Oppenheimer v. Oldham, 5 Cir., 1949, 178 F.2d 386, 390.

This appeal, then, is a proper means for determining Petitioning Creditors' basic contention. For if, as they contend, the Bankruptcy Court as a matter of law lacked jurisdicion to enter the damage award because no bond had been filed, it would have been a patent abuse of discretion at that early date not to permit a filing of a Petition of Review to bring that before the court for decisive action. In other words, the Petitioning Creditors, on such hypothesis, ought not to have been remitted to equity suits, state or federal, to enjoin the enforcement of the final decree of April 27 on which, we are told, execution had been issued by the Clerk.

This contention precipitates a triple inquiry. First, does § 69, sub. a² requiring a bond for the appointment of a receiver, and § 69, sub. b³ providing for the allowance of costs, counsel fees and damages occasioned by such seizure to be determined summarily as in § 50, sub. n,⁴ fix a liability against petitioning creditors where no bond is filed? Second, is the proceeding against petitioning creditors who are thus not parties to a bond one for summary or plenary action? Third, if a plenary suit is otherwise required, was there consent to summary action by failure to object as now spelled out under the 1952 amendments to § 2, sub. a(7).⁵

As to the first, Petitioning Creditors argue that determination of damages and counsel fees to a bankrupt is not a matter ordinarily of concern to the Bankruptcy Court. Consequently, the argument proceeds, Congress could not have meant to establish a liability apart from the bond. But if, as is so plain, the filing of a bond does establish a liability and prescribes a summary means of determination, it is equally clear that Congress did recognize that it was appropriate that the Bankruptcy Court have the means of protecting alleged bankrupts from serious losses through improvident seizures of property. In the Congressional approach three things seem evident. First, alleged bankrupts need protection against ex parte action of creditors. Second, the alleged bankrupt ought not to have to be content with the financial ability of a petitioning creditor to respond for damages. And third, a ready procedural means should be afforded to make the security effective. The first eliminates questions of substantive law, varying from state to state, on malicious prosecution. For under § 69, sub. b, note 3, supra, the event which brings into play the liabilities imposed is "if the petition for adjudication be dismissed, or withdrawn by the petitioners." On such an event, § 69, sub. b peremptorily requires that the court "shall fix and allow * * * counsel fees, expenses and damages occasioned by such seizures."⁶ No issue of probable cause or abuse of process is involved. "It is the purpose of § 69 to spare the bankrupt the expense and trouble of seeking either of the * * * remedies" of malicious prosecution or restitution of property. In re Haff, 2 Cir., 1905, 135 F. 742, 743. 4 Collier, Bankruptcy § 69.02 at 866 and § 69.04 at 875, footnote 23.

As to the second and third of these Congressional considerations, it is quite understandable why specific provision was made concerning proceedings against a surety. A surety is neither a creditor nor a bankrupt. It is not a party, as such, to bankruptcy proceedings. The obvious purpose, then was to subject such a surety to the jurisdiction of the court in which the bond was posted. This is spelled out both in § 69, sub. b and by incorporation of § 50, sub. n, see notes 3 and 4, supra. The fact that the amount fixed by the Bankruptcy Court is "to be paid by the obligors on such bond," § 69, sub. b, or that "collection" be enforced through appropriate process "from those liable on the bond," § 50, sub. n, does not make it any less the liability of the petitioning creditors. The bond is the security to assure payment. By its own terms, see note 6, supra, the obligation of the bond to pay is on the part of the principal, i. e., the petitioning creditor. The surety's obligation comes into existence only in the event of default. And, in any case, on ordinary principles of suretyship, there is an automatic duty of exoneration and reimbursement on the part of the principal to the surety. Restatement, Security §§ 111, 112; 50 Am.Jur., Suretyship, §§ 219-225. The ultimate payment, therefore, will be by the petitioning creditors with the surety being a mere conduit. The reference to "obligors on such bond" or those "liable on such bond" was also to make clear that only those specific creditors petitioning for the appointment of a receiver, and not other creditors, are to be liable for these consequential damages. 4 Collier § 69.04 at 871, note 9 and 873-874. Van Duser v. American Surety Co. of New York, 153 Misc. 715, 274 N.Y.S. 939; In re General Research Laboratories, Inc., D.C.N.Y., 7 F.2d 512.

It is now recognized that where a bond has been posted, the Court may award damages against the principals (petitioning creditors) in excess of the bond. 4 Collier § 69.04 at 874.⁷ This demonstrates that the bond does not create the liability. And since the bond is inadequate to the extent of such excess, it reflects as well that the bond is not indispensable to the operation of the procedural mechanism for determining damages.

We need spend little time on the question...