Imperial Paper & Color Corporation v. Sampsell

• Decision Date: 07 September 1940
• Docket Number: No. 9422.,9422.
• Citation: 114 F.2d 49
• Parties: IMPERIAL PAPER & COLOR CORPORATION v. SAMPSELL.
• Court: U.S. Court of Appeals — Ninth Circuit

114 F.2d 49 (1940)

IMPERIAL PAPER & COLOR CORPORATION v. SAMPSELL.

No. 9422.

Circuit Court of Appeals, Ninth Circuit.

August 12, 1940.

Rehearing Denied September 7, 1940.

Hiram E. Casey, of Los Angeles, Cal. (Horace W. Danforth, of Los Angeles, Cal., of counsel), for appellant.

Craig & Weller, Frank C. Weller, and Thomas S. Tobin, all of Los Angeles, Cal., for appellee.

Before WILBUR, DENMAN, and MATHEWS, Circuit Judges.

MATHEWS, Circuit Judge.

Wilbur J. Downey filed a voluntary petition in bankruptcy on November 18, 1938. Adjudication followed on November 19, 1938. Appellee was appointed trustee and, as such, took possession of and sold property — a stock of merchandise — belonging to Downey Wall Paper & Paint Company, a California corporation. Thereafter appellant, a creditor of the corporation, filed its claim for $5,415.95. This was a claim against the proceeds of the corporation's property which were then, and presumably are still, in appellee's hands. As against said proceeds, appellant prayed that its claim be accorded priority over those of the bankrupt's creditors. To this appellee objected. A hearing was had and, on September 28, 1939, the referee entered an order which allowed appellant's claim as a general unsecured claim against the bankrupt estate, disallowed it as a prior claim and declared that appellant had no right to the proceeds of the corporation's property except as a general unsecured creditor of the bankrupt. The referee's order was reviewed and affirmed. From the order of affirmance this appeal is prosecuted.

The record¹ discloses the following facts:

Prior to filing his petition in bankruptcy, the bankrupt was at all pertinent times a retail merchant residing and doing business in Los Angeles, California. Prior to April 1, 1933, he and one Gotwals were partners doing business as Downey & Gotwals. On April 1, 1933, Downey & Gotwals owed Standard Textile Products Company (hereinafter called Standard) for merchandise sold and delivered to them $126,360.72. On April 1, 1933, the partnership was dissolved. Of the $126,360.72 which the partners owed Standard, the bankrupt assumed and agreed to pay $125,060.72. In evidence thereof, he executed and delivered to Standard two promissory notes dated April 1, 1933, payable on demand — one for $111,060.72, without interest, and one for $14,000, with interest at 6% per annum payable quarterly.²

Also, on April 1, 1933, the bankrupt and Standard entered into a contract³ whereby Standard appointed the bankrupt as one of its distributing agents and agreed to provide him with a "consigned stock of its products"⁴ sufficient to enable him to carry on business as such distributing agent. The bankrupt agreed to carry on said business and to pay Standard, for application on his notes, "all of the net proceeds derived by the bankrupt from the operation of said business in excess of the actual operating overhead, including any money realized by the bankrupt from the sale and/or liquidation of any or all of his assets, irrespective of whether derived from said business or not."

The bankrupt's contract with Standard did not preclude him from carrying on a general mercantile business. He did carry on such business from April 1, 1933, until the filing of his petition in bankruptcy. Part of his stock in trade was obtained from Standard, part of it elsewhere. Prior to July 28, 1936, he dealt, among other things, in Wall paper and paint, neither of which was obtained from Standard.

Appellant was at all pertinent times a manufacturer or wholesaler of wallpaper. In April, 1936, the bankrupt, desiring to purchase wall paper from appellant on credit, conferred with appellant's president and was told by him that appellant would extend no credit to the bankrupt unless the bankrupt's indebtedness to Standard was settled. The bankrupt's indebtedness to Standard was never settled. Consequently, appellant never sold the bankrupt any wall paper and never became a creditor of the bankrupt.

On June 17, 1936, the bankrupt's attorney, Frank S. Hutton, acting for and on behalf of the bankrupt, advised appellant that the corporation — Downey Wall Paper & Paint Company — was being organized with a capital of $15,000, with the bankrupt, his wife (Mildred Downey) and his son (David Downey) as incorporators; that its capital stock ($15,000) would be issued to its incorporators, one-third to each, and would be paid for by them; and that the bankrupt proposed to sell the corporation his then existing stock of wall paper and paint.

The corporation was organized on or about July 1, 1936. Its incorporators and shareholders were the bankrupt, his wife and his son. Its shares had a par value of $100 each.⁵ We assume — there being no evidence to the contrary — that the shares were issued and paid for as the bankrupt's attorney had told appellant they would be. Thus we assume that 50 shares were issued to and paid for by each of the incorporators. The bankrupt apparently did not retain all of his 50 shares. In Schedule B(3-b) annexed to his petition in bankruptcy, he stated that, at the time of filing the petition, he owned 27 shares. In his testimony before the referee, he stated that, at the time of filing the petition, he owned five shares. Which, if either, statement was correct we do not know. It is clear, however, that the bankrupt never owned more than one-third of the corporation's stock and, at the time of filing the petition, may have owned as little as one-thirtieth.

On July 21, 1936, the bankrupt, pursuant to the California bulk sales law (Civil Code, § 3440), recorded in the office of the county recorder a notice of the intended sale of his then existing stock of wall paper and paint to the corporation. The notice stated that the sale would be made on July 28, 1936, for a consideration of $7,500 represented by the corporation's promissory note payable six months from that date. The sale was made pursuant to the notice. Thereafter the corporation dealt in wall paper and paint, and the bankrupt dealt in other merchandise. The corporation and the bankrupt occupied the same premises, the corporation being the bankrupt's tenant. There was, however, no intermingling of their goods. The corporation's business was separate and distinct from that of the bankrupt.

At the time of the sale by the bankrupt to the corporation — July 28, 1936 — Standard was the bankrupt's only creditor. At that time the contract of April 1, 1933, between Standard and the bankrupt⁶ was still in force. Thereby the bankrupt was required to, and presumably he did, pay over to Standard or its assignee,⁷ for application on his notes, all money realized from the sale made by him to the corporation on July 28, 1936.

The bankrupt received in consideration of the sale the corporation's note for $7,500, of which it is conceded $5,000 was paid. The bankrupt testified before the referee that the balance ($2,500) was not paid. As to this, however, the bankrupt's testimony may well be doubted. From Schedule B(2-b) annexed to the petition in bankruptcy, it appears that, at the time of filing the petition, the bankrupt did not own or hold any promissory note. From Schedule A(3) and from a proof of debt filed by the corporation,⁸ it appears that, at the time of filing the petition, the bankrupt was not a creditor of the corporation, but was indebted to it in the sum of $1,625. Therefore, we think it may reasonably be inferred that the corporation's note for $7,500 was fully paid, and that Standard or its assignee received the full amount thereof.⁹

Standard and its assignee were fully advised of the sale by the bankrupt to the corporation. Neither of them objected or complained. Instead, with full knowledge of the sale, Standard and its assignee extended further credit to the bankrupt to the amount of more than $5,000.¹⁰

Between September 26, 1936, and September 26, 1938, appellant sold and delivered to the corporation, on credit, wall paper for which, on September 26, 1938, the corporation owed appellant $5,415.95. In evidence thereof, the corporation executed and delivered to appellant four promissory notes dated September 26, 1938 — three for $1,500 each payable in two, three and four months, respectively, and one for $915.95 payable in five months, all bearing 6% interest from date. No part of this indebtedness has been paid. Payment thereof from the proceeds of the corporation's property was and is sought by appellant in this proceeding.

Appellee's objections to appellant's claim were (1) that appe...