In re American Southern Publishing Company

• Decision Date: 25 May 1970
• Docket Number: No. 27558.,27558.
• Parties: In the Matter of AMERICAN SOUTHERN PUBLISHING COMPANY, Bankrupt. The FIRST NATIONAL BANK OF MOBILE, Appellant, v. George Lewis BAILES, Jr., the Trustee, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

426 F.2d 160 (1970)

In the Matter of AMERICAN SOUTHERN PUBLISHING COMPANY, Bankrupt.

The FIRST NATIONAL BANK OF MOBILE, Appellant, v. George Lewis BAILES, Jr., the Trustee, Appellee.

No. 27558.

United States Court of Appeals, Fifth Circuit.

April 20, 1970.

Rehearing Denied and Rehearing Denied May 25, 1970.

T. Massey Bedsole, Louis Braswell, Mobile, Ala., for appellant.

R. Clifford Fulford, Birmingham, Ala., for appellee.

Before BELL, AINSWORTH, and CARSWELL, Circuit Judges.

Rehearing Denied and Rehearing En Banc Denied May 25, 1970.

BELL, Circuit Judge:

This appeal arises out of a turn-over proceeding brought by a trustee in bankruptcy against The First National Bank of Mobile to recover funds derived from the sale of certain books. The trustee and the bank had previously stipulated that the books would be sold and that the question whether the bankruptcy court had summary jurisdiction would be decided on the basis of the proceeds standing in lieu of the books.

The single issue to be resolved is whether the bankruptcy court correctly determined that the books were in the constructive possession of the bankrupt at the time of the initial petition in bankruptcy and, therefore, within that court's summary jurisdiction. The district court affirmed the ruling of the referee that summary jurisdiction was appropriate. We disagree.

The bankrupt, American Southern Publishing Company, a book publisher, entered into contracts with the State of Alabama to supply certain textbooks for the Alabama public schools. The books involved in the present case were held in an independent warehouse, Publishers' Warehouse Division of EBSCO Investment Services, in Birmingham pursuant to a depository contract between the bankrupt and the warehouse. Under that contract, the warehouse acted as bankrupt's agent in the distribution of the textbooks to the Alabama schools.

On June 24, 1966, at bankrupt's request, the warehouse prepared a certified inventory of bankrupt's books held by the warehouse. The bankrupt mailed this document to the bank on June 25, 1966, referring to it in a cover letter as "Notarized official warehouse receipts from Publishers' Warehouse."

On July 7, 1966, bankrupt wrote the warehouse that it had "concluded a working agreement" with the bank for a loan, "and as a form of collateral we made a consignment of our inventory now warehoused in the Publisher's Warehouse." The bank wrote the warehouse on July 21, 1966, asking that the warehouse recognize the assignment of the inventory by the bankrupt. The warehouse responded on August 19, 1966, in a letter to the bank as follows: "We hereby agree, to the extent we can legally do so, that we will not ship any more of said books from our warehouse without your consent."

On July 19, 1966, the bankrupt made the bank a loss payee under the fire insurance policy on the books in the warehouse. Bankrupt wrote the State of Alabama on August 15, 1966, directing that warrants in payment of textbooks be made payable to the bank, for the bankrupt's escrow account, and be mailed directly to the bank. The State complied with bankrupt's direction in this regard.

It became burdensome for warehouse to obtain bank's consent for small, individual orders from teachers for only a few books. Bank, bankrupt, and warehouse, therefore, agreed on September 12, 1966, that bank's consent would be unnecessary for these very small shipments, payment for which would be made to the warehouse. Such orders represented only a small percentage of total sales.

The warehouse consistently sought and obtained the bank's approval before books were shipped to Alabama school purchasers. Even when bankrupt itself needed textbooks to furnish as complimentary copies, it asked the bank to send its consent to the warehouse for the release of these books.

From August 22 to September 30, 1966, bankrupt executed ten promissory notes payable to the bank totaling $109,087.57. Each of the notes¹ stated that it was secured by the pledge of "Books valued at $166,980.95 covered by (warehouse's) receipt dated June 24, 1966. Copy of receipt attached hereto." The certified inventory prepared by warehouse was attached to each of the notes.

On October 7, 1966, bankrupt filed its petition in bankruptcy. The bank and the trustee then agreed that the books should be sold in the regular course of business utilizing the procedures established before bankruptcy. They also agreed that the proceeds should be held by the bank in the same status and subject to the same rights of the parties as they had with respect to the books themselves. The trustee initiated this turnover proceeding in the bankruptcy court, claiming that summary jurisdiction was appropriate because the books were in the constructive possession of the bankrupt at the time the bankruptcy petition was filed. The bank objected to the referee taking summary jurisdiction, contending that warehouse held the books for the bank rather than the bankrupt and that the books, therefore, were in the bank's possession.

After a hearing, the referee overruled the bank's objection to summary jurisdiction and, on the same evidence, ordered the bank to turn over the funds to the trustee. The bank filed petitions to review both the order denying the bank's objection to summary jurisdiction, and the order directing turn over. The district court affirmed the decision of the referee. We reverse.

It is settled that the Bankruptcy Courts have summary jurisdiction to adjudicate controversies relating to property over which they have actual or constructive possession. Thompson v. Magnolia Petroleum Company, 1940, 309 U.S. 478, 481, 60 S.Ct. 628, 84 L.Ed. 876. And at the outset of a bankruptcy proceeding, the referee has a right and a duty to inquire into and decide whether it has that actual or constructive possession which is essential to its jurisdiction to proceed. Harris v. Avery Brundage Co., 1938, 305 U.S. 160, 163, 59 S.Ct....