In re Jack Kardow Plumbing Company, 29132.

• Decision Date: 22 November 1971
• Docket Number: No. 29132.,29132.
• Parties: In the Matter of JACK KARDOW PLUMBING COMPANY, Bankrupt. AMERICAN STANDARD, INC., Petitioner-Appellant, v. Harry A. NASS, Jr., Trustee in Bankruptcy, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

451 F.2d 123 (1971)

In the Matter of JACK KARDOW PLUMBING COMPANY, Bankrupt.

AMERICAN STANDARD, INC., Petitioner-Appellant, v. Harry A. NASS, Jr., Trustee in Bankruptcy, Respondent-Appellee.

No. 29132.

United States Court of Appeals, Fifth Circuit.

October 28, 1971.

Rehearing Denied November 22, 1971.

COPYRIGHT MATERIAL OMITTED

Lewin Plunkett, Dayton G. Wiley, Jerry A. Gibson, Robert A. Allen, Wiley, Plumb & Plunkett, San Antonio, Tex., for petitioner-appellant.

Joe Warren Jones, Thompson & Jones, San Antonio, Tex., for respondent-appellee.

Before COLEMAN, INGRAHAM, and WILKEY,^* Circuit Judges.

WILKEY, Circuit Judge :

This case comes to us with an extremely complex and confusing record. As will become clearer later, many of the difficulties in this case are due to the somewhat unorthodox way in which the Referee characterized the bankrupt, and the effect that this had on all of the bankruptcy proceedings.

The Jack Kardow Plumbing Company (the company) was a plumbing business operated by the individual Jack Kardow in San Antonio, Texas. By late 1966 the company was in financial trouble, and on 12 December 1966 an involuntary petition in bankruptcy was filed in the United States District Court for the Western District of Texas against the company by three creditors. The petition alleged that the company was a partnership, consisting of Jack Kardow and one Warfield Smith. Service of process was had on Kardow, as representative of the company, but not on Smith, who disputed and denied the existence of a partnership,¹ and no effort was ever made to make either Smith or Kardow individually a party to the proceedings. On 17 or 18 January 1967 the Jack Kardow Plumbing Company was adjudged a bankrupt by default.² At the time the company was adjudged a bankrupt, no attempt was made to determine whether or not it was a partnership. By this time the Referee had concluded that the subject matter of the petition might apply to two classes of "persons" which could become bankrupts under the Bankruptcy Act, namely, the company as a partnership, or the company as a sole proprietorship owned by Jack Kardow. The Referee concluded that under either possibility he would have jurisdiction, since service of process had been obtained on the company's representative, Jack Kardow.³ At this point the Referee was apparently treating the company as a "trade style,"⁴ an entity unknown to the Bankruptcy Act, which provides only that corporations, partnerships, and individuals may become bankrupt.⁵ Considerably later, on 7 October 1969, the Referee clarified his original order of adjudication (17 or 18 January 1967) to show that the company was really Jack Kardow, the individual, doing business as Jack Kardow Plumbing Company,⁶ and it is in that character that the proceedings are now before us.

On 9 June 1967 American Standard, Inc. (Amstan), filed in the estate of the bankrupt proof of secured claim in the amount of $5,634.27.⁷ In its petition Amstan maintained that it did not "in any way consent to the Summary Jurisdiction of the Bankruptcy Court to determine the existence or nonexistence of a preference," or to take any action relating thereto.⁸ Nevertheless, invoking this summary jurisdiction, on 29 February 1968 the trustee of the bankrupt objected under § 57, sub. g of the Bankruptcy Act⁹ to the allowance of the Amstan secured claim, alleging that Amstan received voidable preferential transfers of the bankrupt's property in the amount of $34,659.63, and demanding the recovery of this sum from Amstan. The transfers in question were made on 26 August 1966 and 4 October 1966, and were assignments of the company's accounts receivable to Amstan. By 29 February 1968 Amstan had apparently collected $34,659.63 on the accounts.

After some pre-trial maneuvering¹⁰ the preference issue came to trial before the Referee on 22 and 23 January 1969. At the trial on the preference issue Amstan alleged and sought to prove that at the time of the two assignments the company was a solvent partnership composed of Jack Kardow and Warfield Smith, and attacked the jurisdiction of the bankruptcy court over anything but a partnership on the allegations of the involuntary petition. Furthermore, Amstan maintained that the bankruptcy court had no jurisdiction of the preference issue under § 57, sub. g because Amstan had only filed proof of a secured claim in the bankruptcy estate. Amstan maintained that this filing should place it in the same position with respect to its unrelated preference as a creditor who remains entirely passive and against whom the trustee is required to proceed in a plenary suit. Alternatively, Amstan argued that if the trustee was to be allowed to recover the preferences, it was entitled under § 60, sub. c of the Bankruptcy Act¹¹ to a setoff for credit extended after the alleged preferential transfers.

On 6 March 1969 the Referee issued findings of fact and conclusions of law resolving all these issues against Amstan, and ordered Amstan to surrender to the trustee the $34,659.63 collected on the assignments. Amstan then filed a petition in the District Court for review of the Referee's findings, and in response to this petition on 26 March 1969 the Referee filed a certificate which elaborated somewhat his view that all the evidence gathered in the administration of the estate subsequent to the default adjudication in bankruptcy pointed to the conclusion that the bankrupt was not a partnership, but the sole proprietorship of Jack Kardow¹² Oral argument was heard on 18 September 1969 before the District Judge, and apparently in response to a request by him, on 7 October 1969 the Referee filed a supplement to his certificate of 26 March 1969. In this supplemental certificate the Referee explained at length why he purposely omitted reference to the status of the bankrupt when the default adjudication was originally entered,¹³ and he asserted that his deferring the determination of the status of the bankrupt "had no prejudicial effects upon and resulted in no injury to any of the parties at interest of Jack Kardow Plumbing Company."¹⁴ The Referee went on to assert that Amstan, as a creditor, could not be considered a party at interest, and did not have the right to contest the bankruptcy court's adjudication of its jurisdiction over the bankrupt (whatever its status) under § 18, sub. b of the Bankruptcy Act.¹⁵ In this supplemental certificate the Referee also enumerated the factors that had led him to conclude that the company was not a partnership.¹⁶

In this 7 October 1969 certificate the Referee also revealed another puzzling aspect of this case, namely, that at sometime after the involuntary petition was filed against the company, Jack Kardow, acting as an individual, filed a voluntary bankruptcy petition.¹⁷ The Referee commented in the supplemental certificate that Kardow's subsequent proceeding had no relationship to the prior involuntary proceeding presently under review. Furthermore, he went on to add, "As the involuntary petition was sufficient to adjudicate Jack Kardow individually a bankrupt doing business as Jack Kardow Plumbing Company, the subsequent voluntary proceeding filed by Jack Kardow was unnecessary and cumulative of the involuntary petition previously filed."¹⁸

On 17 November 1969 the District Court affirmed the order of the bankruptcy court, expressly adopting the findings of fact and conclusions of law entered by the Referee on 6 March 1969.

In appealing this decision of the District Court, Amstan raises the three issues that it argued before the Referee. For our purposes the issues that are before us may be phrased as follows : (1) May Amstan challenge the jurisdiction of the Referee to adjudicate the company a bankrupt on an involuntary petition filed against a partnership ? (2) Did the Referee have summary jurisdiction over Amstan to try the issue of voidable preference and to order Amstan to return such preferences? (3) Would Amstan be entitled to a setoff for materials subsequently furnished the bankrupt, if it must surrender its preferences?

I. The Attack on the Jurisdiction of the Referee

Amstan attacks the jurisdiction of the Referee over the company, asserting that the involuntary petition, filed against a partnership, cannot confer jurisdiction on the Referee to deal with an entity which he has found to be an individual. The record shows that the company was adjudicated a bankrupt on meagre evidence which consisted primarily of the allegations in the involuntary petition filed by creditors who, it now seems clear, were not in possession of accurate information regarding the status of the debtor. This has resulted in a confused administration of the bankrupt estate whereby, at least initially, and perhaps even now, only the assets of the company, and not the personal assets of Kardow are involved in this proceeding.

In the beginning of this action, when the Referee thought he was dealing only with a "trade style," Kardow's individual assets were not brought into the bankruptcy court. At the conclusion of the trial of the preference issue, however, the Referee apparently decided that the bankrupt was not the partnership alleged in the involuntary petition, but was actually the sole proprietorship of Jack Kardow. Since the Bankruptcy Act does not provide for bankruptcy proceedings against sole proprietorships limited to involving business assets only, but provides only for actions against individuals qua individuals, the Referee's decision that it was the individual Kardow who was before the bankruptcy court in this proceeding should have resulted in a decision that Kardow's individual action would be consolidated with the proceeding against the company. It is possible that this was done, and there is a possible inference to that effect from some of the statements by the Referee,¹⁹ but the record is not clear on this point. Indeed, there is no solid pronouncement by the Referee after the...