Georgia Jewelers, Inc. v. Bulova Watch Co.

• Decision Date: 25 April 1962
• Docket Number: No. 19219.,19219.
• Citation: 302 F.2d 362
• Parties: GEORGIA JEWELERS, INC., Alleged Bankrupt, Appellant, v. BULOVA WATCH CO., Golden Shield Corporation, Gruen Watch Co., and Columbia Diamond Ring Corporation, Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

302 F.2d 362 (1962)

GEORGIA JEWELERS, INC., Alleged Bankrupt, Appellant, v. BULOVA WATCH CO., Golden Shield Corporation, Gruen Watch Co., and Columbia Diamond Ring Corporation, Appellees.

No. 19219.

United States Court of Appeals Fifth Circuit.

April 25, 1962.

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Arnold S. Kaye, Atlanta, Ga., for appellant.

J. Kurt Holland, Haas, Holland & Zinkow, Atlanta, Ga., William M. Sinrich, for appellees.

Before RIVES, BROWN and WISDOM, Circuit Judges.

JOHN R. BROWN, Circuit Judge.

This appeal from a single order of the District Court affirming the decision of the Referee contested in two separate Petitions to Review filed by the Bankrupt¹ brings into question procedural problems concerning the sufficiency of the involuntary Petition of Bankruptcy, amendability of it, the propriety of the appointment of a Receiver to take over the books and records of the Bankrupt, the propriety of the use of the information gained from them in preparing amendments, and certain actions in connection with discovery depositions and interrogatories. Of a substantive nature is the question whether the Referee was correct in holding that a Court of Bankruptcy has no jurisdiction of a counterclaim by the Bankrupt seeking affirmative relief against the Petitioning Creditors. Interwoven with all of these questions is the problem of the reviewability of various Orders and the timeliness of the Petition to Review. As did the District Judge, we approve the two questioned orders and thereby all contested related actions of the Referee and affirm the District Court.

Probably the most important aspect of this case is not even the subject of an attack or counterattack by either party. That is the manner in which these appeals have brought the whole bankruptcy proceeding to a dead halt. In that respect the case demonstrates vividly the wisdom of the general proposition that (a) the statutory right to appeal from interlocutory orders of necessity requires that such orders be restricted to those having a definitive operative "finality," and (b) the balance of the proceeding should go on unless, on application and showing, a stay is granted under § 39, sub. c, 11 U.S.C.A. § 67, sub. c.

The Petitions of Review, as required by § 39, sub. c, were brought within 10 days of the two Orders of May 16 and May 24, 1961. Each of these Orders was precise and limited. That of May 16 allowed the amendments to the Bankruptcy Petition and denied the Bankrupt's Motion to Vacate the Receivership. That of May 24 dismissed the Bankrupt's asserted counterclaim against Petitioning Creditors.² But each of the two Petitions for Review set forth in great detail the complex steps taken between the time of the filing of the Petition on the preceding March 16 and May 16, May 24, respectively, and each complained of a number of actions taken by the Referee during that interim.³ As to none of such preliminary Orders was a Petition of Review taken within the mandatory 10-day period. The Creditors urge that as to none of the antecedent preliminary Orders was review timely, consequently under the machinery of the Bankruptcy Act, such Orders are deemed to be those of the District Court, and as such are final and irretrievable. The Bankrupt contends that the 10-day period begins to run from the date of the final Order, and hence all prior interlocutory Orders are open for review.

As we think that our affirmance of the two main Orders of May 16 and May 24 — as to which appealability and timeliness is not in dispute — washes out practically all of the preliminary orders or actions complained of, we do not think it necessary or wise to discuss each one of them (a through q) in terms of reviewability. Nor, in view of this, do we think it appropriate to discuss generally the controlling factors which bear on timeliness of review.

The attack on the May 16 order is primarily that the initial involuntary petition of bankruptcy was so "fatally defective" that it could not be amended. This rests on the contention that in setting forth the statutory acts of bankrupty, the petition was substantially a paraphrase of the substantive statute (§ 3, 11 U.S. C.A. § 21) without evidentiary details as to names of creditors, amounts and exact dates of preference payments, transfers, etc. This was remedied by the amended petition filed April 6 (see g) which set forth some 62 specific transactions occurring between January 3 and March 7. But the Bankrupt asserts that this was ineffective since it was based on information improperly obtained through a Receiver appointed pursuant to a fatally defective petition. Moreover, the verification on it was defective. The Bankrupt objects to the Creditors' "Amendment to the Amendment" (see k) since this motion acknowledged that the motion of April 6 to amend (see g) failed to set forth in accordance with General Order 11, 11 U.S.C.A. following section 53 and F.R.Civ.P. 7(b) (1), 28 U.S.C.A. the reasons why the Amendment was tendered. More than that, the Bankrupt objected on the ground that the reasons stated in the motion constituted a judicial admission that at the time of the filing of the original petition the Creditors did not in fact have knowledge that the Bankrupt had committed either one or both of the specified statutory acts of bankruptcy.

Of course decisions can be found which talk in terms of "fatally defective" petitions, but we agree with Collier's that such descriptives are not decisive. "Far more preferable is the view that defects in pleading are not `jurisdictional'; that whether or not they may be cured depends upon the power of amendment, and that a bankruptcy court has ample jurisdiction to permit amendments. Aside from a few isolated instances, judicial opinion amply supports these views." 2 Collier, Bankruptcy § 18.05, at 16. It is a question of amendability. That brings into play the Federal Rules of Civil Procedure, since under General Order 37⁴ they are applicable insofar as not inconsistent with the Bankruptcy Act.

Except where the terms of the Act or the General Orders or forms prescribed by them, call for evidentiary detail, the usual principle should prevail. Matching this intial petition against F.R. Civ.P. 12(b) (6), it certainly met the simple standard elucidated in Conley v. Gibson, 1957, 355 U.S. 41, 78 S.Ct. 99, 2 L.Ed.2d 80, and repeated by us almost monthly as we continue the sometimes despairing task of reestablishing a positive rule simply expressed but which must constantly resist erosion from the subtle influence of the local state practice on sufficiency of pleadings.⁵ This petition actually did more than paraphrase the statute. It set forth in quite enough detail for the Bankrupt to know what to expect — that the transaction between it and its alleged affiliate Associated Investments, Inc. of Georgia was directly involved.

All in all the petition was sufficiently good to withstand a motion to dismiss. See 2 Collier, Bankruptcy § 18.26, at 51. Kay v. Federal Rubber Co., 3 Cir., 1930, 46 F.2d 64, 65; South Suburban Safeway Lines, Inc. v. Carcards, Inc., 2 Cir., 1958, 256 F.2d 934. To the extent that amendment was required — a point we need not decide since amendments were made — we are likewise clear that the allowance of them was well within the discretion of the Referee. Defective verifications may certainly be cured. E. L. "Bunch" Hullett, Inc. v. Universal C. I. T. Credit Corp., 10 Cir., 1958, 259 F.2d 685; Harris v. Mills Novelty Co., 10 Cir., 1939, 106 F.2d 976. So can a failure literally to follow General Order 11 or F.R.Civ.P. 7(b) (1) concerning motions to amend. And if — as we have just held — full evidentiary details do not have to be alleged in the petition at the very outset, there was nothing so "fatal" about the belated statement of the reason why the amendment was necessary to take this out of the wise discretion of the Referee.

Apart from the form of the petition and the amendments, the Bankrupt seeks to have us also determine substantive questions at this time. So far as substantive timeliness is concerned, the two specified acts of bankruptcy having been alleged sufficiently to withstand a motion to dismiss, the question of relation back is governed by F.R.Civ.P. 15(c). A similar contention that no substantive claim is stated by the amended petition which alleges the transfer by the Bankrupt to its affiliate of certain notes due by it to others and on which the affiliate allegedly foreclosed a mortgage, must likewise fail at this stage. The proofs may ultimately show, as the Bankrupt contends, that this could not be such a transfer as to constitute an act of bankruptcy. But in the light of other indications of transfers between the Bankrupt and its affiliates to the apparently complete disadvantage of creditors generally, it does not appear to a certainty that evidence is unavailable to make out a prohibited act. In other words, this now depends on proof, not pleadings.

This means that the District Court was justified in upholding the Referee's order of May 16 p. With it falls also many preliminary actions d, g, i and k.

Once we determine that the petition was sufficient, the attack on the appointment of a Receiver fails. Appointment of the Receiver to take custody and control of the books and records of the Bankrupt — nothing else apparently existed after intra-affiliate transactions — was certainly within the Referee's discretion. Harris v. Capehart-Farnsworth Corp., 8 Cir., 1953, 207 F.2d 512; Kattelman v. Madden, 8 Cir., 1937, 88 F.2d 858. The formal showing in the initial verified application was quite sufficient, and it was corroborated by the Receiver's deposition taken by the Bankrupt. Thus other challenged items collapse b, c, f, p.

In reaching these conclusions, we have had to consider — and now reject — the basic contention of the Bankrupt. The Bankrupt contends that information may not be used to shore up a defective petition where such detailed...