Bingaman v. Commonwealth Trust Co.

• Decision Date: 21 September 1926
• Docket Number: No. 457.,457.
• Citation: 15 F.2d 119
• Parties: BINGAMAN et al. v. COMMONWEALTH TRUST CO. et al.
• Court: U.S. District Court — Western District of Pennsylvania

15 F.2d 119 (1926)

BINGAMAN et al. v. COMMONWEALTH TRUST CO. et al.

No. 457.

District Court, M. D. Pennsylvania.

September 21, 1926.

Daniel H. Kunkel, John F. Sweeney, Paul G. Smith, John R. Geyer, all of Harrisburg, Pa., for plaintiffs.

Spencer G. Nauman, M. W. Jacobs, C. H. Bergner, all of Harrisburg, Pa., for defendants.

JOHNSON, District Judge.

On December 9, 1924, the plaintiffs filed their bill of complaint against the defendants to avoid certain bonds alleged to have been issued without consideration by the bankrupt corporation, in violation of section 7 of article 16 of the Constitution of Pennsylvania, and of section 4 of the Act of Assembly of Pennsylvania of April 17, 1876 (P. L. 32; Pa. St. 1920, § 5649); and also to secure the return of interest paid upon said bonds.

The bill avers, in substance, that the Harrisburg Foundry & Machine Works, on July 1, 1918, executed a mortgage or deed of trust to the Commonwealth Trust Company of Harrisburg, Pa., trustee, to secure an issue of $600,000 par value of first, and refunding 6 per cent. gold bonds, and that on December 31, 1918, $100,000 par value of these bonds were issued to William Jennings, trustee of a certain syndicate, therein named, who distributed them among the members of the syndicate in proportion to their respective interests. This syndicate was formed prior to November 23, 1915, for the purpose of manufacturing war materials at the plant of the company, the Harrisburg Foundry & Machine Works. On November 23, 1915, an agreement was entered into between the company and the syndicate in which the syndicate agreed and undertook to place the necessary machinery and equipment for the manufacture of war materials in the plant of the company, which were to remain the property of the syndicate, and in which agreement all moneys received on account of a certain contract between the company and the J. G. Brill Company, for the manufacture of 30,000 shells, at $6.25 per shell, which was executed on the same day, and was part of the same transaction, were to be paid to William Jennings, trustee of the syndicate, who was to distribute the money derived therefrom as follows: To the company, $1.45 for each shell, and to the members of the syndicate in proportion to their respective contributions thereto, $4.80 per shell. The syndicate was also to continue interested in all subsequent orders of like character for a period of five years.

The work under this contract undertaken by the syndicate was unsuccessful, and resulted in a loss both to the syndicate and the company, and the work was abandoned, and the machinery and equipment were sold by the trustee of the syndicate, and the proceeds distributed among the members of the syndicate.

Although no obligation was imposed upon the company to assume any liability and loss resulting to the syndicate, nevertheless the company issued $100,000 of its bonds to the trustee of the syndicate, without consideration, in an attempt to permit the syndicate members to recoup losses sustained by them in the enterprise for which no liability rested upon the company.

When the bonds were issued and delivered by the company to the syndicate, through its trustee, the members of the syndicate, by stock ownership control of the members of the board of directors of the company, dominated and controlled the management and affairs of the company so as to induce such corporate action as the syndicate required to carry into effect its plan of securing the $100,000 of bonds for the use of the members of the syndicate.

The defendants in the bill are the Commonwealth Trust Company, trustee under the mortgage, William Jennings, trustee of the syndicate, and all of the present holders of the bonds.

The defendants, with the exception of Alfred Sohland and Dora Sohland, have filed a motion to dismiss the bill of complaint, and have assigned eight reasons in support thereof, which will be considered in their order:

"(1) For the reason that Howard M. Bingaman, trustee in bankruptcy of the Harrisburg Foundry & Machine Works, and the Peddicord Sons Transfer Company, a Maryland corporation, are joined as parties plaintiff, there being no authority for law for such joinder."

The trustee alone has the right to maintain an action of this kind. The creditors appoint or elect the trustee, and he represents all of the creditors, and it is improper to join with him in an action of this kind one of the creditors.

In Glenny v. Langdon, 98 U. S. 20, at page 24 (25 L. Ed. 43), Mr. Justice Clifford, delivering the opinion of the court, said: "Power and authority are also vested in the assignee by virtue of the bankruptcy, and his appointment to manage, dispose of, sue for, and recover all his property or estate, real or personal, debts or effects, and to defend all suits at law or in equity pending against the bankrupt. 14 Stat. 525. Congress, in framing the Bankrupt Act, it is believed, intended to provide instrumentalities for its complete execution, and such as are sufficient to carry it into full effect."

And in Re Schrom (D. C.) 97 F. 760, District Judge Shiras said: "The proper course to pursue is for the petitioning creditors to take proceedings in the proper court, state or federal, in Illinois, in their own name, setting up the proceedings now pending in bankruptcy in this court as the basis of their action, and asking that court to protect the rights of creditors in the property situated in Illinois, either by the appointment of a receiver, by injunction, or any other appropriate remedy. If the adjudication in bankruptcy is had, then the trustee who will be appointed can then appear in that case on behalf of creditors, and take control of the proceedings."

Where the receiver of an internal improvement fund, who was appointed by the court, filed a bill in equity to determine upon what amount of certain bonds the purchaser was bound to make semiannual payment, it was held that the holders of the bonds were not proper parties complainant. Doggett v. Railroad Co., 99 U. S. 72, 25 L. Ed. 301. In this case it was said by Mr. Justice Swayne, delivering the opinion of the court: "We have no doubt as to the merits of the bill. We think the objection of misjoinder was also well taken. The case was purely ancillary in its character. The receiver represented the court which appointed him and the trustees of the internal improvement fund. Vose and Wagner claimed to own a part of the outstanding bonds. But that gave them no standing place in the litigation. As well might every other holder of any of the bonds, however small the amount, or how numerous such holders might be, have been made co-complainants with the receiver, as Vose and Wagner. The presence of the latter as such parties was unwarranted, and if permitted, and the suit had gone on, would have incumbered the record unnecessarily and have led to confusion."

The same principle is laid down in Southern Express Co. v. Railroad Co., 99 U. S. 191, where, on page 199 (25 L. Ed. 319), Mr. Justice Swayne, delivering the opinion of the court, said: "No party defendant was necessary but the receiver. He was in possession of the property and effects of the railroad company, subject to the order of the court, and could have specifically performed the contract, or paid back the money loaned if the court had so directed. The presence of the other parties was immaterial, and the bill might well have been dismissed as to them."

In Trimble v. Woodhead, 102 U. S. 647, 26 L. Ed. 290, it was said by Mr. Justice Miller: "Nor is the creditor of a bankrupt without remedy in such a case as the present. If he is aware of the existence of property or credits, which should rightfully go to the assignee for the benefit of creditors, he should inform the assignee of all he knows on the subject, and request him to proceed, by suit if necessary, to recover it. If he declines, a petition to the court of original jurisdiction would, if a proper case was made, compel the assignee to proceed. Glenny v. Langdon 98 U. S. 20, 25 L. Ed. 43, supra. Indeed, the whole question is so fully considered in that case that little more need be said."

"(2) For the reason that it appears by the bill of complaint that the Peddicord Sons Transfer Company is an unsecured creditor of the Harrisburg Foundry & Machine Works, and hence has no standing to maintain this suit."

According to the bill, the Peddicord Sons Transfer Company is a simple contract creditor, and a simple contract creditor cannot maintain a bill to set aside a transfer of property by his debtor.

In Viquesney et al. v. Allen, 131 F. 21, 65 C. C. A. 259, it was held that a simple contract creditor cannot maintain a bill in equity to set aside fraudulent conveyances of his debtor's property, and to have the same administered by a receiver. District Judge McDowell, who delivered the opinion in this case, said: "In Cates v. Allen, 149 U. S. 451, 13 S. Ct. 883, 37 L. Ed. 804, the facts were essentially the same as in the case at bar. Simple contract creditors filed a bill in equity in the federal court, alleging a fraudulent assignment by the debtor; praying for an injunction, for the appointment of a receiver, and that the assigned property be subjected to complainants' debts. The court said, at page 457, 149 U. S., and page 884, 13 S. Ct., 37 L. Ed. 804:

"`The principle that a general creditor cannot assail, as fraudulent against creditors, an assignment or transfer of property made by his debtor, until the creditor has first established his debt by the judgment of a court of competent jurisdiction, and has either acquired a lien upon the property, or is in a situation to perfect a lien thereon and subject it to the payment of his judgment, upon the removal of the obstacle presented by the fraudulent assignment or transfer, is elementary. Waite on Fraud. Con. § 73, and cases cited. The existence of judgment, or of judgment and execution, is necessary, first, as...