In re Naftalin & Co.

• Court: U.S. District Court — District of Minnesota
• Citation: In re Naftalin & Co., 315 F. Supp. 463 (D. Minn. 1970)
• Decision Date: 08 July 1970
• Docket Number: 4-70 BKY-170.,No. 4-70 BKY 137,4-70 BKY 137
• Parties: In the Matter of NAFTALIN & CO., Inc., a Minnesota corporation, Alleged Bankrupt (two cases).

315 F. Supp. 463

In the Matter of NAFTALIN & CO., Inc., a Minnesota corporation, Alleged Bankrupt (two cases).

Nos. 4-70 BKY 137, 4-70 BKY-170.

United States District Court, D. Minnesota, Fourth Division.

July 8, 1970.

O'Connor, Green, Thomas, Walters & Kelly, by Joe A. Walters and Frank J. Walz, Minneapolis, Minn., for alleged bankrupt.

Richards, Montgomery, Cobb & Bassford, Minneapolis, Minn., by L. H. May, Jr., and Jon D. Jensvold, Minneapolis, Minn., for petitioning creditors Merrill Lynch, Pierce, Fenner & Smith and Paine, Webber, Jackson & Curtis.

Faegre & Benson, by Bruce F. Burton, Minneapolis, Minn., for petitioning creditor Piper, Jaffray & Hopwood, Inc.

Mackall, Crounse, Moore, Helmey & Holmes, by Clay R. Moore, Minneapolis, Minn., and Schiff, Hardin, Waite, Dorschel & Britton, by Burton R. Rissman, Chicago, Ill., for petitioning creditors H. S. Kipnis & Co., Donaldson, Lufkin & Jenrette, Inc. and Francis I. duPont & Co.

NEVILLE, District Judge.

February 10, 1970, three brokerage houses, Merrill Lynch, Pierce, Fenner & Smith of New York; Paine, Webber, Jackson & Curtis of New York; and Piper, Jaffray & Hopwood, Incorporated of Minneapolis filed a petition in bankruptcy alleging "provable claims * * * amounting in the aggregate to $500.00 * * *" and seeking to have Naftalin & Co., Inc., a Minnesota corporation at one time engaged in the stock brokerage business, adjudged an involuntary bankrupt. February 18, 1970, eight days later, three other brokerage houses, H. S. Kipness & Co. of Chicago; Donaldson, Lufkin & Jenrette, Inc. of New York; and Francis I. duPont, of New York City filed a separate petition with similar allegations and seeking the same relief. Normally, under this court's general order of August 5, 1964 entered pursuant to 11 U.S.C. § 45, the clerk of court automatically would have referred these cases to a Referee in Bankruptcy for his attention and determination. Naftalin & Co. however answered the petitions denying its insolvency and timely demanded a jury trial.

11 U.S.C. § 42 provides:

"(a) A person against whom an involuntary petition has been filed shall be entitled to have a trial by jury in respect to the question of his insolvency, except as herein otherwise provided, and of any act of bankruptcy alleged in such petition to have been committed, upon filing a written application therefor at or before the time within which an answer may be filed." Emphasis added.

The local Bankruptcy Rules for the United States District Court for the District of Minnesota provide:

"In case a jury trial is demanded, as provided by Section 19 of the Bankruptcy Act, the clerk shall place the case on the next jury trial calendar in the division in which the case is pending, unless otherwise ordered by the judge." Rule 23

Both groups of creditors have moved the court for a summary judgment under Rule 56 of the Federal Rules of Civil Procedure, asserting that there exists no material issue of fact as to Naftalin & Co.'s insolvency and that it committed an act of bankruptcy. They cite in support of their contention numerous previous admissions by Naftalin & Co. of its insolvency.¹ Additionally, and preferably from the petitioner's standpoint after the court has adjudicated Naftalin & Co. a bankrupt, the petitioning creditors request that the case be referred to the referee in bankruptcy for all further proceedings. To the contrary of its demand for a jury trial, the alleged bankrupt Naftalin & Co. has moved the court for a dismissal of both petitions asserting lack of this court's jurisdiction.

In the orderly administration of justice all bankruptcy matters normally should be presented first to a referee in bankruptcy and issues of law and fact there determined. Consequently in this case if there be no genuine fact issue for determination by a jury, the court does not believe that it should determine ab initio Naftalin & Co.'s solvency or insolvency, nor should the court adjudicate it a bankrupt if insolvency is determined. A Referee has expertise in bankruptcy matters and should consider and determine cases in the first instance, subject of course to a review by this court when the appropriate steps have been taken to bring the same before the court. Consequently this court need not in the first instance pass on the issue of whether as a matter of law a summary judgment adjudicating bankruptcy may or should be entered pursuant to Rule 56 of the Federal Rules of Civil Procedure, but rather should confine itself solely to a determination of the more narrow issue as to whether or not under 11 U.S.C. § 42 there is a question present for determination by a jury; for if there is not, then this court should take no action and merely enter an order of reference to a Referee in Bankruptcy.

The controversy in the case at bar arises from certain transactions had between Naftalin & Co. and some 23 various firms of stock brokers, six of whom are petitioners herein, in late July and August 1969. Naftalin sold "short" certain securities — that is sold securities which it did not then own. It never delivered the stock it had ordered sold to cover the "short" sales and as a result defendant became what is know in the stock brokerage vernacular as a "fail." Meantime, pursuant to requirements of law, the brokerage houses procured or "lent" stock to deliver to the purchasers to make good Naftalin & Co.'s sales.² In the latter part of October, 1969, the various brokerage houses "bought in" Naftalin & Co., that is bought stock in the market on the stock exchanges to replace the stock which Naftalin & Co. had sold but failed to deliver. It is claimed that the total loss to the 23 brokerage houses approximates or exceeds $1,200,000.

On November 4, 1969 more than three months prior to the filing of the first involuntary petition herein the Securities and Exchange Commission commenced an action in this court — Securities and Exchange Commission v. Naftalin & Co., Inc., No. 4-69 Civ. 385 — as a result of which the Honorable Earl R. Larson, a judge of this court, on December 23, 1969 entered an order appointing a receiver to take charge of Naftalin & Co.'s affairs and assets. Though in its original answer in that receivership proceeding Naftalin & Co. admitted its insolvency and inability to meet its liabilities as they accrued and matured, an amended answer denying such was duly filed by the alleged bankrupt in the receivership proceedings on June 25, 1970 after the hearing before this court, pursuant to the order of the Honorable Earl R. Larson of June 4, 1970 granting leave therefor. The receivership is still extant and the receiver now holds some $28,000 in assets. In addition, pursuant to an order in said receivership proceedings of Judge Larson dated March 27, 1970, some $550,000 or more of bearer United States bonds have been turned over to and are now in the possession of and held by the Clerk of this court, no ruling having yet been made as to their entitlement so far as this court is advised.³ It is claimed that the appointment of the receiver aforesaid constitutes the Fifth Act of Bankruptcy under 11 U.S.C. § 21(a) (5) which reads in part:

"(a) Acts of bankruptcy by a person shall consist of his having

* * * * * *

(5) while insolvent or unable to pay * * * debts as they mature, procured, permitted or suffered voluntarily or involuntarily the appointment of a receiver or trustee to take charge of * * * property." Emphasis added

It is obvious that the question of Naftalin & Co.'s solvency or insolvency must be determined before there can be an adjudication in bankruptcy and the same question of insolvency is involved in determining whether there has been the Fifth Act of Bankruptcy. Therefore if a jury trial were had the issue of solvency or insolvency would be important in two different ways.

Alleged Bankrupt's Motion to Dismiss

The first matter presented to the court is the alleged bankrupt's motion for dismissal of the present action.

Naftalin & Co.'s answer denies that the petitioners are creditors of Naftalin & Co., although admitting that contracts for the sale of certain securities were entered into by and between the parties, denies that a receiver was suffered to be appointed while the corporation was in a state of insolvency and alleges further that in any event, the receiver appointed by Judge Larson in the Securities and Exchange Commission case is not the type of receiver which is encompassed within the Fifth Act of Bankruptcy. Naftalin & Co. asserts that this court lacks jurisdiction to adjudicate it a bankrupt or take possession of its property, distribute it and administer the affairs of the corporation because of the pendency of the prior receivership in this court. It is urged that exclusive jurisdiction was invoked by that proceeding and that the only receiver or trustee or custodian that could properly conduct the affairs of the company is the one that was appointed December 23, 1969 aforesaid. Counsel contends that as a receiver was appointed in the SEC action aforesaid, he, and only he must carry the case through to complete liquidation. The argument is premised on Section 27 of the Securities Exchange Act of 1934 (15 U.S.C. § 78aa) which states in part:

"The district courts of the United States, and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder * * *"

It is asserted that this exclusivity requires not only that state courts be prevented from hearing certain causes but also that other federal courts, and in particular a federal court sitting in bankruptcy, is forbidden to proceed in certain causes of action. In other words, Naftalin & Co. claims that once a court...