Langham, Langston & Burnett v. Blanchard

• Decision Date: 15 August 1957
• Docket Number: No. 16498.,16498.
• Citation: 246 F.2d 529
• Parties: LANGHAM, LANGSTON & BURNETT, Appellant, v. Thomas B. BLANCHARD, Trustee of the Estate of Lone Star Sulphur Corporation, Bankrupt, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

246 F.2d 529 (1957)

LANGHAM, LANGSTON & BURNETT, Appellant, v. Thomas B. BLANCHARD, Trustee of the Estate of Lone Star Sulphur Corporation, Bankrupt, Appellee.

No. 16498.

United States Court of Appeals Fifth Circuit.

June 29, 1957.

Rehearing Denied August 15, 1957.

St. John Garwood, Jr., Houston, Tex., Fulbright, Crooker, Freeman, Bates & Jaworski, Houston, Tex., for appellant.

Thomas B. Blanchard, Houston, Tex., for appellee.

Before HUTCHESON, Chief Judge, and TUTTLE and JONES, Circuit Judges.

JONES, Circuit Judge.

Lone Star Sulphur Corporation was organized to exploit a supposed sulphur deposit on land leased to it. Wells had been drilled. No sulphur in paying quantities had been produced. The company had ceased operation. It was without funds and without credit. Efforts of management of the corporation to raise additional money to continue the efforts to produce sulphur had been unsuccessful. Such was the plight of the company on December 20, 1954. On that day the appellant, Langham, Langston & Burnett, a partnership, instituted suit against the company in the district court of Harris County, Texas, and on the following day, December 21, 1954, it caused a writ of attachment to be levied upon property of the corporation. A judgment for the partnership and against the corporation for $7,444.46, which included $900.00 attorneys' fees, followed. On March 17, 1955, a levy under execution was made on the property which had been attached and on other property of the corporation. On March 28, 1955, the corporation filed a voluntary petition in bankruptcy. The appellee, T. B. Blanchard, became the bankruptcy trustee. The partnership filed a claim in the bankruptcy proceeding and asserted it as a secured claim by reason of the attachment and levy. The trustee objected to the claim as a secured claim on the grounds that the attachment and levy were made within four months of bankruptcy and that the corporation was insolvent when the attachment and levy were made. Bankruptcy Act, § 67, sub. a(1), 11 U.S.C.A. § 107, sub. a(1). A hearing on the trustee's contest of the claim was held on February 20 and 22, 1956. At that hearing the history of the Lone Star Sulphur Corporation was developed by the testimony of its Treasurer, Charles N. McClendon, and W. G. B. Morrison, its sometime President, Counsel, and Director. Appellant offered the testimony of Clayton Stephenson, a chemical engineer and one of the designers of the bankrupt's plant, to prove the value that parts of the bankrupt's plant would have if taken down and moved 100 miles. Objection was made and sustained to the testimony on the ground that the witness did not qualify as an expert. Having heard all the evidence the referee determined that the Lone Star Sulphur Corporation was insolvent at the time the lien attached. An order was entered which sustained the trustee's contention and relegated the claimant-appellant to the position of an unsecured creditor.

On a petition to review the referee's order the district court, in a memorandum opinion, held that the referee's determinations were supported by the evidence, and the referee's order was affirmed. On September 4, 1956, the appellant filed a motion to reopen the proceedings and received as newly discovered evidence a mineral lease from the former lessors of the bankrupt to the purchaser of the bankrupt's assets. The lease was for production of sulphur from the land which had formerly been leased to the bankrupt. The lease was executed on November 22, 1955, but not placed of record until May 1, 1956. The trustee opposed the motion on the ground that the newly discovered evidence was not material. The motion was denied. From the order sustaining the referee's determination that the appellant's claim was unsecured, and from the order denying the motion to reopen the proceedings, this appeal is taken.

The findings of the referee, approved by the district court, are under attack by the appellant. Among these findings are:

"VII

"I find that at the time of the filing of the suit, the execution of the attachment, the judgment foreclosing the same, and the levy of the execution by the Sheriff of Fort Bend County, Texas, the said Lone Star Sulphur Corporation was not a going concern, but had ceased operations several months prior thereto.

"VIII

"I further find that said corporation was unable to pay its debts from approximately October 1954 to the date of bankruptcy, and was without credit and had no property that could be sold for sufficient to pay its debts, and that the officers of the corporation had been wholly unable to refinance the corporation.

"XII

"I find that there were filed in these proceedings claims in excess of $146,000.00, representing the liabilities of the corporation and which claims had existed prior to the issuing of claimant's judgment.

"XVI

"I find that the trustee, after duly advertising, tendered the properties of the bankrupt for sale on sealed bids, and that the largest bid submitted, which was a combination of various bids for specific items, was in the sum of $44,691.00 which sale was not confirmed by the referee upon the application and objection of the trustee as being insufficient, and that the trustee was authorized to negotiate a sale.

"XVII

"I find that the trustee did report a negotiated sale in the sum of $80,000.00 for the entire assets of the bankrupt and which sale was, on the recommendation of the trustee, confirmed by the court".

It is urged that these findings are erroneous, both in the application of the law and in the evaluation of the evidence; erroneous in law in that the "equity" rather than the "bankruptcy" test of insolvency was applied; erroneous in the determination of facts in that the referee improperly considered evidence of insolvency as of a time later than that of the attachment. Section 67, sub. a(1) of the Bankruptcy Act provides:

"Every lien against the property of a person obtained by attachment, judgment, levy or other legal or equitable process or proceedings within four months before the filing of a petition initiating a proceeding under this Act by or against such person shall be deemed null and void (a) if at the time when such lien was obtained such person was insolvent * * *." 11 U.S.C.A. § 107, sub. a(1).

The meaning of "insolvent", as used in Section 67, sub. a(1), is that given to it in Section 1(15) of the Act where it is said:

"A person shall be deemed insolvent within the provisions of this Act whenever the aggregate of his property * * * shall not, at a fair valuation, be sufficient in amount to pay his debts". 11 U.S. C.A. § 1(15).

This is a mathematical test, static in character, and its purpose was to remove the confusion that existed under the prior Act. Lasswell v. Stein-Block Co., 5 Cir., 1937, 93 F.2d 322. That it differs from the equity test of insolvency, inability to meet obligations as they mature, is clear. Finn v. Meighan, 325 U.S. 300, 65 S.Ct. 1147, 89 L.Ed. 1624, 57 Am.Bankr.Rep.N.S., 740. The two tests must be kept distinct, and reversible error will result from their confusion or commingling. Duncan v. Landis, 3 Cir., 1901, 106 F. 839, 5 Am. Bankr.Rep. 649; In re Utrecht Coal Co., 2 Cir., 1933, 63 F.2d 745, 23 Am.Bankr. Rep.N.S., 155.

Appellant points to Finding of Fact VIII, supra, as showing that the referee used the wrong test. This does not appear from a reading of that Finding. In Mitchell v. Investment Securities Corporation, 5 Cir., 1933, 67 F.2d 669, this court said of bankruptcy insolvency:

"Statutory as well as commercial insolvency arises out of, and consists in, inability to pay debts. One is insolvent under the statute when his assets, if converted into cash, at a fair not forced sale will not pay them. In both cases solvency is tested by ability to pay debts, in the one case promptly, in the other, in time." 67 F.2d 669, 671.

It appears that the referee used "unable to pay" in a sense no different from the converse of "ability to pay" as used in the Mitchell opinion. The referee cited and relied on the Mitchell decision. In the memorandum opinion affirming the referee, the district court quotes the definition of § 1(15) as the correct meaning of insolvency. We do not find that an improper test was applied. In reviewing the finding of insolvency, this court will not disturb the resolution of that factual question unless it is clearly erroneous. Bankruptcy General Order 36, 11 U.S.C.A. following section 53; Rule 52(a) Fed.Rules Civ.Proc., 28 U.S. C.A.; In re Di Palo (Weinberger), 2 Cir., 1955, 218 F.2d 816.

The argument that the finding is clearly erroneous rests on the contention that it disregarded evidence which was conclusive and relied on evidence which was inadmissible. It has been said of the bankruptcy test of insolvency,

"* * * the somewhat abstract and more stringent balance sheet test might, especially under certain conditions, be harder of practical application than the more tangible and, perhaps, more natural equity test." 1 Collier on Bankruptcy, 14th Ed. 92, Par. 1.191.

Such a situation is presented here. The bankrupt corporation was, at the time the lien attached "financially dead or mortally wounded". In re Fred D. Jones Co., 7 Cir., 1920, 268 F. 818, 819, 46 Am. B.R. 396. It was not a going concern and it would not be proper for the assets to be valued at a going concern value. In re Brown Commercial Car Co., 7 Cir., 1915, 227 F. 387, 36 Am.B.R. 45.

This court has dealt with a similar situation in Mitchell v. Investment Securities Corp., supra. In that case, an action to set aside a transfer as preferential, it appeared that the Case-Fowler Company, a hardwood lumber producer, had, after several years of profitable operation, experienced substantial reverses and that the hardwood lumber market had collapsed. For a year prior to a transfer in April, 1931, the lumber company's creditors had deferred action while efforts were made to secure additional capital for...